The stock market, as measured by the S&P 500 Index
SPX,
has continued to rise slowly this month, but the overhead resistance at or just below 4200 has proven to be formidable. There is another resistance level, at 4300.
The bears seem to be timid at the moment, but if the market can’t break through 4200, the bears will surely gain some strength. Below current levels, there is support in the 4050-4070 area, and further support near 3970. But a decline below 3950 would be negative and probably bring in some serious selling.
Net daily changes in SPX and other major indices have been small and decreasing of late, and that has caused a marked decrease in realized volatility. The 20-day Historical Volatility of SPX is now down to 11% — its lowest level since November 2021. The McMillan Volatility Band (MVB) buy signal is still in effect (although we have rolled spreads up a couple of times). Its target is the +4σ Band, which is currently nearing 4200 and rising slowly. That lends even more credibility to the idea of resistance at 4200.
Equity-only put-call ratios have curled upward over the past day or two, but they remain on buy signals according to our computer programs that analyze these charts. They will remain on buy signals until they roll over and begin to rise steadily. The weighted ratio is nearing the lower regions of its chart once again, and thus can be considered to be in overbought territory.
“ Breadth has begun to deteriorate again, although the breadth oscillators are clinging to buy signals at this time. ”
Breadth has begun to deteriorate again, although the breadth oscillators are clinging to buy signals at this time. A strong day of negative breadth will roll them over to sell signals, however. As we’ve noted before, though, we require further confirmation of breadth signals because of their tendency to whipsaw back and forth.
The number of new 52-week highs on the NYSE has been running just slightly ahead of the number of new 52-week lows. Thus, this indicator continues to be in a neutral state, with neither a buy signal nor a sell signal in place.
VIX
VIX,
on the other hand, continues to be a positive indicator for stocks. The “spike peak” buy signal that was generated back in March has “expired” for a nice profit. However, the trend of VIX buy signal remains in place (it began in the circled area of the accompanying VIX chart). The only caveat here is that VIX seems quite low, and that is an overbought condition. However, as noted above, with realized volatility at 11%, VIX is not really going to be too far from that. So, at its current price of 17.50, it’s already got a big premium built in.
The construct of volatility derivatives also remains a positive factor for stocks. The April VIX futures expired yesterday, so May VIX futures are now the front month. The term structure of the VIX futures slopes upward out through September, so that is modestly bullish. The term structure flattens out after that. As for the CBOE volatility Indices, their term structure slopes upward throughout. The warning sign here would appear if May futures were to rise above the price of June futures, but that it is not a real possibility at the current time.
In summary, we are continuing to hold positions in line with the signals generated by our internal indicators. Those are buy signals so far, as we do not have any confirmed sell signals yet. It is possible that some of the current overbought conditions would produce sell signals in the near future, but we do not anticipate that (“overbought does not mean sell”).
New Recommendation: Assurant Inc. (AIZ)
We made this recommendation last week and the week before, but the condition was not satisfied, so no position was taken. We are going to keep it open for another week. There is a new weighted put-call ratio buy signal in AIZ
AIZ,
However, we want to see the stock break out over resistance at 120 before taking on a position.
Conditional Call Buy in AIZ:
IF AIZ closes above 120, THEN Buy 2 AIZ May (19th) 120 calls.
If this position is established, we will hold until the weighted put-call ratio rolls over to a sell signal.
New Recommendation: Jiayen Group (JFIN)
This low-priced stock has broken out over resistance, and a bottom finally appears to be in place after a long period of base-building. The options on JFIN
JFIN,
are quite expensive, even though volume has been elevated on some days. So, we are going to recommend buying the stock, since it doesn’t cost much more than an option.
Buy 400 JFIN in line with the market.
JFIN: 4.31
Stop yourself out on a close below 3.50 by the common stock.
Follow-Up Action:
All stops are mental closing stops unless otherwise noted.
We are using a “standard” rolling procedure for our SPY
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 2 expiring GRMN April (21st) 95 puts: These were bought on February 21st, when GRMN
GRMN,
closed below 95. Even though the put-call ratio is still negative, the stock has not responded. So, sell these puts if you can, and do not replace or roll them.
Long 1 SPY Apr (28th) 410 call and Short 1 SPY Apr (28th) 425 call: This position was bought in line with the MVB buy signal. It was rolled up 15 points on each side, when SPY traded at 410 on April 3rd. The target here is for SPX to trade at its +4σ Band, which is at roughly 4180 and rising slowly. Since there is only a week until expiration, we want to roll this out to May (19th) expiration, keeping the strikes the same.
Long 1 SPY May (19th) 395 call and Short 1 May (19th) 415 call: This spread was bought in line with the equity-only put-call ratio buy signals. It would be stopped out if the ratios moved above their recent peaks. We will update weekly.
Long 1 SPY May (5th) 403 call and short 1 SPY May (5th) 416 call: This spread was bought in line with the breadth oscillator buy signals that occurred around March 27th. It will be stopped out if the breadth oscillators return to sell signals. The breadth oscillators are barely clinging to buy signals, so we are going to roll this spread up. Roll each strike up by 12 points, staying in the May (5th) expiration.
Long 3 ARNC May (19th) 27 calls: Option volume has decreased slightly here, but the takeover rumors are still in place. Continue to hold ARNC
ARNC,
without a stop, while these rumors play out.
Long 3 CARR June (16th) 42.5 puts: We will hold these CARR
CARR,
puts until the put-call ratio rolls over and begins to decline – i.e., as long as the sell signal is in place on the put-call ratio chart.
Long 4 NDAQ Jun (16th) 55 calls: We will hold NDAQ
NDAQ,
call as along as the weighted put-call ratio is on a buy signal.
Send questions to: lmcmillan@optionstrategist.com.
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 best-selling book, Options as a Strategic Investment. www.optionstrategist.com
©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.
