Opinion: S&P 500 charts point to more losses in the stock market
Last week, the S&P 500 dropped to new relative lows. It is now trading at prices last seen in March 2021. This latest downward move violated the support at 4100-4200 and prompted a quick move down towards potential support at 3900. The next support area below is 3700 – the February and March 2021 lows.
Oversold, although readers know that “oversold does not mean oversold”. However, oversold spikes accompany bear markets. They usually outperform at the 20-day moving average or maybe just above that.
The bulls tried to engineer some of the recent oversold rally, but it turns out that they were one-day affairs that – while looking amazing for one – didn’t have the staying power. It happened on April 28 and May 4.
Currently, the 20-day moving average is at 4240 and is rapidly declining. Furthermore, these two one-day walks topped out near 4300, so the general area of 4240-4300 presents resistance.
So far, SPX has not set up a new buy signal for the McMillan Volatility Band (MVB), because it did not close above 4308. It would set up a new signal at lower levels if it could close below the -4σ “adjusted Bollinger Band.” It was not able to do so.
Indeed, SPX was “walking” the narrow lane between the -3σ and -4σ bands. These ranges are dropping more quickly now because the realized volatility has increased significantly. The historical (realized) volatility of the S&P 20-day index is 31% – a very high level.
The buying ratios in the stocks only continue to rise sharply, meaning that they are still on the sell signals. They will only generate buy signals when they roll over and start to fall. This is the highest level they have reached since March 2020, and they are definitely in oversold territory, but they are yet to reach the buy signals.
Meanwhile, the total buy-to-be ratio finally registered a reading above 1.00 in one day over the past week. A buy signal from this indicator usually does not occur until the 21-day moving average reaches 0.90 or higher. At this time, it’s 0.837 – so it’s nowhere near a buy signal either.
The breadth of the market was poor, as one might imagine. There was another “90% drop day” on May 5th. Both oscillators are widely sold as sell signals and are heavily oversold. These oscillators are located roughly at the same levels as they were in late January, when the selling spike occurred – but the market psychology was much more bullish in late January than it is now.
In any case, it will take at least two or three days of positive supply (i.e., more advances than dips) for these things to pull back to buy signals.
New 52-week lows continue to erode 52-week highs. Just one day this week saw 5 new highs on the New York Stock Exchange. This indicator is still bearish and deeply oversold. It will take two days as new highs cross new lows on the NYSE to turn this upward trend. This could happen sooner than one might think, but it doesn’t seem to be in the cards at this time.
VIX’s latest “peak high” buy signal has been discontinued, but this also means that VIX VIX,
Returned to “escalation mode”. Thus, a new “peak high” buy signal will be generated soon. This indicator is very sensitive to oversold reversals, and therefore it is usually one of the first bullish indicators in a falling market.
So far, though, recent signals have been losing signals (the blue “B” on the accompanying VIX chart is losing “peak” longs, but the system we use to trade this indicator is). This is fairly standard procedure during bear markets, and the last time it happened was March-April 2020.
The trend of VIX is still down for stocks, as both VIX and the 20-day moving average are above the 200-day moving average. This will only be interrupted by a VIX closing below 200 days, which won’t happen anytime soon, given that 200 days are around 22 (and slowly rising).
The somewhat volatile derivatives composition has turned negative in its stock market outlook, and it is struggling to avoid turning dangerously negative. The front month May VIX futures are trading partially higher than the June futures contracts. If May rises more than 1.00 pips above June, this will generate a more serious sell signal.
Meanwhile, the VIX futures term structure slopes down modestly, which is another moderate negative for stocks. If the term reverses sharply, it will produce a medium-term sell signal for the stock.
Overall, VIX and its derivatives have not responded in the way one would normally expect in a bear market. VIX has not yet achieved above 40, and the term structure remains relatively flat. This happens sometimes – notably in February and March of 2009, when the VIX held steady (albeit at 55) while the stock market fell to bear market lows. A less serious but similar case occurred in December 2018 as well.
In short, we continue to maintain a “basic” bearish position and will do so as long as the SPX (down) and VIX (up) trends are in place. We will trade oversold buy signals around this “core” position, but only if they are confirming signals.
New Recommendation: VIX Possible ‘Peak High’ Buy Signal
The highest price VIX reached since the previous buy signal was stopped was 35.48 on May 9th. A new “peak high” VIX buy signal will occur when VIX closes at least 3.00 pips below its highest price, using the May 9 price and beyond.
If VIX closes at least 3.00 pips below the highest price reached from May 9 onwards,
Then buy 1 SPY June (17y) at-the-money call
The sale of 1 spy June (17yCall an amazing price 20 pips higher.
New Recommendation: Black Knight (BKI)
takeover offer from Intercontinental Exchange ICE,
Accepted by Black Knight BKI,
It was supposed to be “worth” $85. In fact, that’s even less, because part of the deal is for ICE shares, which have fallen since the deal was announced.
Digging through the press release, it appears the deal is 80% cash at $63.20, plus 20% in ICE stock. So the trade is 63.20 + 0.2 * ICE, which is valued at $82.11 with ICE trading at 94.55. BKI is trading at 69.34, which is a very wide spread. So we will buy BKI calls, and look for the spread to narrow it.
Buy 3 BKI Jun (17y70 calls
at 2.50 or less.
BKI: 69.44 June (17y70 calls: available at 3.00
We will hold out without stopping at first.
follow the movement
All breakpoints are mental breakpoints unless otherwise noted.
We will implement a “standard” rolling action for our SPY spread: on any vertical bull or bear spread, if the underlying hits the short, roll the entire spread. That will be a roll above In the event of a bull call spread or roll under In the event that bears spread. Stay at the same expiration, and keep the distance between strokes the same unless otherwise instructed.
Long 2 Zen Mai (20 .)y) 125 short and short calls May 2 (20 .)y140 calls: The stock gaps to the upside when Zendesk ZEN,
I began evaluating strategic alternatives. Wait without stopping while the activist is still active.
Long 3 Save May (20y25 calls: Wait nonstop for now, as competing bids still stand for Spirit Airlines SAVE,
Long 2 ENV May (20y80 calls: Keep holding on while acquisition rumors spread.
Long 2 SPY May (20y) 401 Puts and Short 2 SPY May (20y) 376 put: We originally bought this spread in line with the sell signal from the VIX trend. It rolled lower when SPY was trading at 401 on May 9. We will hold this spread as long as the VIX remains above the 200 day EMA, which is currently at around 22.
Tall 0 Spy May (27y) 428 short calls 0 SPY May (27y443 calls: This spread was bought on April 28, the day the latest VIX “peak high” buy signal appeared. It was stopped on Monday, when VIX closed above 33.81.
Long 4 MAT May (20y25 calls: We bought it because of the acquisition rumors that spread. Trailing stop at 24.
Long 0 CHK May (20y95 calls: These calls were bought last week and then turned off on Monday, when Chesapeake Energy CHK,
Closed under 86.
Send questions to: email@example.com.
Lawrence G. MacMillan is President of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in the securities recommended in this report, either in person or in client accounts. He is an experienced trader, money manager and author of the bestselling book Options as a Strategic Investment.
Not giving an opinion: © McMillan Analysis Corp. 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. Officers or directors of McMillan Analysis Corp. may have. or accounts managed by these persons positions in the securities recommended in the advisory.