S and P 500 – Opinion: The next big test for the S&P 500 is at 4,120
As always seems to be the case, everyone tries to squeeze out the exit at the same time. The result is a massive selloff – at least for a short time. That’s what happened on Wednesday, although things had been weakening for the two days prior to that.
The stock market, as measured by the S&P 500 index
had been on “cruise control,” hitting a new all-time high on May 7. This week, however, has seen daily declines of 44, 36, and 89 SPX points, with a downside gap left on the chart on May Tuesday.
Furthermore, the support in the 4120 area has given way, which is more than a minor negative. The breach of that support level brought in major selling, as it seems that many traders were looking at a failure of that support level as a catalyst for selling.
Hence, “everyone” was trying to sell at once, producing a monster down day. The next support level is just below 4000 – the March highs. Then, below that is the major support at 3850-3870, whence the powerful rally from March 26 to April 16 was launched.
In addition, a McMillan Volatility Band (MVB) sell signal has been confirmed. That happened when SPX traded down through 4105 intraday on May 12. We bought SPY put bear spreads when that happened. The sell signal will remain in effect until the index touches either the +4σ Band (which would stop out the signal) or the -4σ Band, which is the target for the signal.
The decline on May 12 was so swift that SPX has almost reached those lower (target) Bands, but realized volatility is exploding right now, so the Bands will attempt to move lower quickly – away from the S&P’s declining 20-day moving average.
For the record, the chart of the Dow Jones Industrial Average
is quite similar to that of SPX, having reached a new high as recently as May 10 but now having fallen through the first support level. The charts of the NASDAQ-100
and the Russell 2000
are much weaker, as they have not made new highs this month.
Equity-only put-call ratios remain on sell signals. They issued sell signals right around May 1. Even though some of their sell signals in the past year have not been all that great, we have been in a “don’t ignore sell signals” mode for a while now, so we had taken a bearish position based on this indicator. These sell signals will remain in place as long as the put-call ratios continue to rise.
Breadth has been somewhat problematic for months now. NYSE breadth has been stronger than “stocks only” or NASDAQ breadth, because of the general weakness of NASDAQ and small-cap stocks. Even so, both “stocks only” and NYSE breadth oscillators generated sell signals on May 10 and May 11, respectively. Those oscillators have already plunged into an oversold state, but “oversold does not mean buy.”
New 52-week highs had been running at tremendously large levels. On both May 7 and May 10, NYSE and “stocks only” new highs were at the highest daily counts in at least five years. But that all came to a sudden halt when new 52-week lows exceeded new 52-week highs (in all 3 data sets, but most importantly in terms of NYSE data) on May 11. That generated a sell signal that would be negated if new highs exceeds new lows (on the NYSE) for two consecutive days.
Almost unbelievably, on Wednesday, when the market was getting trashed, new highs outnumbered new lows on the NYSE.
While all this was going on, both implied volatility (VIX) and realized volatility (the S&P’s 20-day historical volatility) began to increase and then exploded over the past couple of days. VIX
is now in “spiking” mode. That is not good for the market, as a rapidly increasing VIX is negative for stocks. However, a VIX “spike peak” buy signal will eventually emerge (when VIX stops “spiking”), and that indicator has a strong track record. So, we will be looking for that buy signal soon.
Meanwhile, VIX has risen above its still-declining 200-day moving average, which is a minor negative. But as long as the 20-day MA remains below the 200-day MA, there is still a possibility of a limited market decline.
The construct of volatility derivatives is also something that needs close attention right now. So far, it has remained bullish. But if the May VIX futures start to trade at higher prices than the June VIX futures, that would be a very negative sign. The term structure of the VIX futures still slopes upward out through September, though, so that is positive for stocks.
The term structure of the Cboe Volatility Indices is a little more convoluted, but it generally slopes upward out through the six-month contract, too. Hence, this area of analysis remains positive for the market.
In summary, as often happens when the market is extremely overbought, all is well until it’s not. It often only takes one or two days of negative action to bring sellers out of hibernation. So now we have a number of new confirmed sell signals, and we will trade those with the systems we have created around them.
The bulls’ next best hope is a VIX “spike peak” buy signal, which will likely occur soon. But for now, support has been broken, and as long as SPX is below 4120, the bears have a chance to take control for a while.
New recommendation: Duke Energy
had been approached by NextEra Energy
in the fall of 2020 regarding a potential takeover. Nothing came of that, but now an activist investor has bought into Duke Energy and is attempting to acquire board seats. Thus, the takeover rumors are back in play. Stock volume patterns are very strong, and there is support in the 99-101 area.
Buy 3 DUK June (18th) 100 calls
At a price of 3.00 or less.
DUK: 101.25 June (18th) 100 call: 3.30 offered
New recommendation: Potential VIX ‘spike peak’ buy signal
VIX is spiking upward now, which is negative for the market. But when VIX stops spiking, a buy signal will occur. So,
- Keep track of the highest price that VIX has reached while in “spiking” mode. So far that is 28.38 on May 12, but VIX could go higher.
- When VIX closes at least 3.00 points below that highest peak price, then
- Buy 2 SPY June (11th) at-the-money calls and sell 2 SPY June (11th) calls with a striking price 15 points higher.
Once this buy signal is in place, we would be stopped out if VIX returned to “spiking mode” – that is, if VIX increased by at least 3.00 points (using closing prices) over any three-day period. That would stop out the trade, but would then set up a new buy signal, using the parameters detailed above.
New recommendation: Potential VIX term structure inversion sell signal
Thus far, the May VIX futures have continued to trade below the price of the June VIX futures. However, if the following condition is met, then we want to add some SPY put bear spreads to our position:
If May VIX futures trade at a premium to June VIX futures of at least 1.00 point or more,
Then buy 1 SPY June (4th) at-the-money put
And sell 1 SPY June (4th) put with a striking price 25 points lower.
If bought, this spread would be stopped out if May VIX futures subsequently settled (i.e., closed) at a lower price than June VIX futures.
All stops are mental closing stops unless otherwise noted.
Long 0 SPY May (14th) 417 calls: This position was originally a SPY call bull spread, taken in line with the VIX “spike peak” buy signal of March 5. It was rolled up three times and then stopped out May 12.
Long 0 SPY May (14th) 414 calls: This position has also been rolled up three times and was also stopped out on May 12.
Long 2 CXP May (21st) 17.5 calls: Hold without a stop for now as we wait for the spread in this deal ($19.50 cash takeover) to shrink.
Long 0 VIX May (19th) 21 puts. This position was stopped out on May 11.
Long 0 SPY May (14th) 417 calls: This position was initially bought as an upside breakout trade, and it has been rolled up as well. It was stopped out on May 12.
Long 2 LEAF May (21st) 9 calls: on April 5, Leaf Group
received an all-cash buyout offer of 8.50 from Graham Holdings. Hold without a stop while the rumors of a higher bid play out.
Long 6 HLIT May (21st) 8.5 calls: Hold without a stop while this activist situation plays out.
Long 8 FXY Jun (18th) 87 calls: Hold without a stop as long as this put-call ratio buy signal is in place.
Long 4 CCIV May (21st) 23 calls: Set a stop at 18.
Long 2 SPY June (11th) 410 puts and short 2 SPY June (11th) 385 puts: This trade was taken because of the MVB sell signal that occurred, when SPX traded down through 4105 on May 12. It would be stopped out by SPX once again closing above the +4σ Band. Effectively, at this point, we are holding without a stop. It which reach its profit target if SPX trades at the -4σ Band. Right now, the lower Band is accelerating downward. Sell half of this position if SPX trades at 4000 at any time.
Long 1 SPY May (28th) 416 put and short 1 SPY May (28th) 396 put: This recommendation is based on the equity-only put-call ratio sell signal that is in place. Hold this recommendation as long as the equity-only put-call ratios are on sell signals. Hence, we will be updating the status weekly. For now, hold without a stop. Roll the position down, 20 strikes on each side, if SPY trades at 396 at any time.
Send questions to: [email protected]
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the bestselling book, “Options as a Strategic Investment.”
Disclaimer: ©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.
S and P 500 – Opinion: The next big test for the S&P 500 is at 4,120
Tags: S and P 500, S&P 500