The S&P 500 index may be about to secure two major bullish SPX, -0.08% milestones.
First, the S&P has rallied from that mid-June low right up to the major resistance at 4170. A two-day close above that level would be quite bullish and would set the stage for a challenge of the downtrend line defining this bear market as well as a challenge of the 200-day moving average – both of which are currently near 300.
Second, the trend of VIX is changing, which would mean an intermediate-term buy signal. More about that later.
As the stock market has advanced, certain indicators are getting overbought. They will eventually generate sell signals, and we will trade them as they occur.
One of the first is that SPX has now closed above its +4σ “modified Bollinger Band” (mBB). This will eventually set up a “classic” mBB sell signal when SPX eventually closes back below the +3σ Band.
However, we would not trade that signal. We will wait to see if there is confirmation of that “classic” sell, which would mean a McMillan Volatility Band (MVB) sell signal. That we would trade, but it is not necessarily guaranteed.
In any case, neither the “classic” nor the MVB sell signal has occurred yet.
Equity-only put-call ratios continue to fall, and thus both ratios remain bullish in their outlook for stocks. The weighted ratio has been dropping more rapidly and is already in the lower half of its chart. As long as these ratios are declining, that is bullish for the stock market.
LAWRENCE MCMILLAN
Breadth has been strong on this rally, and both breadth oscillators remain on buy signals – rather deeply in overbought territory. That overbought condition is a positive thing in the initial stages of a new bullish phase in the stock market (and I believe we are still in the initial stages of this rally). The breadth oscillators are at such high numbers that they could withstand a couple of days of negative breadth and still remain on those buy signals. Eventually, a sell signal will occur from breadth, but that is not immediately at hand.
The lone remaining sell signal is the comparison of new 52-week highs vs. lows. New Highs on the NYSE are still small in number (25 on Wednesday, and the peak over the last week was 45 one day). Thus, this indicator remains negative.
VIX VIX, -2.32% has continued to decline slowly as the market has risen. Even so, a major change of the intermediate-term trend of VIX appears to be at hand.
VIX crossed below its 200-day moving average last week, when it fell below 24. Now VIX’s 20-day MA is crossing below the 200-day MA. If it holds this cross below, it would mean that the trend of VIX is downward (i.e., both VIX and its 20-day MA are below the 200-day MA).
A downward-trending VIX is an intermediate-term buy signal for the stock market. This is the first time since last November that the trend of VIX has been downward.
The construct of volatility derivatives VX00, -5.81% has improved as well. It had been modestly bullish for stocks, but now it is taking on a fully bullish stance. The term structure of the VIX futures slopes upward through (it is a little flat at the far end). Also, the term structure of the CBOE Volatility Indices is positive.
In summary, a “core” bearish position will no longer be justified if SPX closes above 4170 for two consecutive days, and that could happen very quickly. Meanwhile, we continue to hold our various long positions that were bought in line with our indicators. Eventually, we will begin to see sell signals, but they have not emerged yet.
New recommendation: VIX trend buy signal
As noted in the Market Commentary above, VIX is on the verge of a major intermediate-term buy signal for stocks in that it is beginning to trend downward. We want to trade that signal:
IF VIX closes below 24.00 today,
THEN buy 1 SPY Sept (16th) at-the-money call
And sell 1 SPY Sept (16th) call with a striking price 15 points higher.
If this position is established, we will hold it as long as $VIX does not cross back above its 200-day moving average. Specifically, stop yourself out if VIX closes above 24.60 for two consecutive days.
New recommendation: SPX breakout buy signal
Also as noted in the Market Commentary above, SPX SPY, -0.07% is on the verge of a major upside breakout.
IF SPX closes above 4170 for two consecutive days,
THEN buy 1 SPY Sept (16th) at-the-money call
And sell 1 SPY Sept (16th) call with a striking price 15 points higher.
If bought, we would stop ourselves out on an SPX close below 4070.
New recommendation: VanEck Oil Services ETF
This recommendation is based solely on the put-call ratio buy signal for the VanEck Oil Services ETF OIH, -5.31%. From the accompanying chart, one can see that previous buy signals over the past year have been well-timed. Since these are high-priced options, we are going to use a call bull spread.
Buy 2 OIH Sept (16th) 230 calls
And sell 2 OIH Sept (16th) 250 calls
In line with the market.
OIH: 231.85 Sept (16th) 230-250 call bull spread: 8.30 bid, offered at 9.30
We will hold this position as long as the weighted put-call ratio for OIH remains on a buy signal.
Follow-up action
All stops are mental closing stops unless otherwise noted.
We are going to implement a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread or roll down in the case of a bear put spread. Stay in the same expiration, and keep the distance between the strikes the same unless otherwise instructed.
Long 6 AMLX Aug (19th) 22.5 calls: Raise the closing stop to 21.50.
Long 1 SPY Aug (19th) 398 call and short 1 SPY Aug (19th) 418 call: A SPY call bull spread was originally bought in line with the McMillan Volatility Band (MVB) buy signal, and it has been rolled. It was most recently rolled up when SPY traded at 398 on July 21. Its target is for SPX to touch the +4σ Band, and that has occurred, so sell this spread now.
Long 10 CRNT Aug (19th) 2.5 calls: Aviat Networks AVNW, +1.31% announced it had submitted a revised non-binding proposal to acquire all of the outstanding shares of Ceragon Networks CRNT, -2.54% for $3.08 per share ($2.80 in cash per share, plus $0.28 in equity consideration). Continue to hold for now.
Long 2 COWN Aug (19th) 30 calls: The company COWN, +0.16% received a takeover offer for $39 cash. Sell these calls at a price of 8.20 or more; leave the rest for the risk arbs.
Long 2 AAPL Sep (16th) 160 calls: This position was rolled up when Apple AAPL, -0.19% traded at 160. We will hold these as long as the put-call ratio buy signal remains in effect.
Long 2 SPY Aug (19th) 411 calls and short 2 SPY Aug (19th) 426 calls: These spreads were bought on July 21, when several indicators generated buy signals. Then they were rolled up when SPY traded at 411 on July 29. We will stop ourselves out of this trade in the following manner: sell half if the breadth oscillators roll back over to sell signals and sell half if the equity-only put-call ratios roll back to sell signals. Both remain on buy signals at this time (see the Market Comment above).
Long 1 SPY Sept (16th) 402 put and short 1 SPY Sept (16th) 377 put: Stop out of this position if SPX closes above 4170.
Long 3 MRO Oct (21st) 24 calls: we will hold this position as long as the put-call ratio for Marathon Oil MRO, -6.20% remains on a buy signal.
