Opinion: Bulls control the stock market and are targeting the S&P 500’s all-time high

The stock market, as measured by the S&P 500 Index
decisively broke out over 4400 a couple of weeks ago. Since the October 27th low, the U.S. benchmark index has rallied more than 450 points. That qualifies it as being overbought, but “overbought does not mean sell.” 

We don’t have any confirmed sell signals yet, but they might not be far off. SPX is approaching its 2023 yearly highs, just above 4600. That might prove to be a resistance area, but if it is overcome, then the market will set its sights on the all-time high just above 4800 (set in January 2022). 

For the past couple of weeks, SPX has been trading above the +4σ “modified Bollinger Band” (mBB). On November 29th, SPX closed below the +3σ Band, which is a “classic” mBB sell signal. The index didn’t really trade down through the band as much as the bands are rising, and the +3σ band surpassed the price of SPX. Regardless, we don’t trade the “classic” signals, but this is a possible precursor to a full-fledged McMillan Volatility Band (MVB) sell signal which we do trade. That MVB sell signal will occur if SPX trades at 4533 or lower. Not every “classic” signal becomes a MVB signal, though, so wait for the confirmation before entering into a bearish position.

Equity-only put-call ratios are dropping more rapidly now. The amount of put buying has decreased dramatically, and the amount of call buying is increasing accordingly. As long as these ratios are declining, that is bullish for the broad stock market. 

Market breadth has been just OK.  I would have expected it to be much more positive while SPX was exploding to the upside, but it was not. However, the breadth oscillators are still on buy signals, although only in modestly overbought territory. A day or two of negative breadth is going to generate sell signals from these oscillators.

There were more than 100 New Highs on the NYSE one day this week, but then that number backed off. So, this indicator remains in a neutral status. If there are more than 100 New Highs for two consecutive days on the NYSE, that would constitute a buy signal. Likewise, if there are more than 100 New Lows for two consecutive days, that would be a sell signal.

The CBOE’s Volatility Index


has declined to a new yearly low. In fact, this is the lowest it’s been since January 2022 — just before the market crashed in the pandemic selloff. Before one jumps to the conclusion, though, that a VIX this low is bearish, remember that VIX can remain low for long periods of time. This is merely another overbought condition and would not become worrisome until VIX returns to “spiking” mode (a gain of at least 3.0 points over any 3-day or shorter time period, using closing prices). Meanwhile, the “spike peak” buy signal has expired profitably, and the trend of VIX buy signal is still in effect. The two circles on the accompanying VIX chart show the onset of the two most recent trend of VIX buy signals. 

The construct of volatility derivatives remains bullish in its outlook for stocks. The term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upwards, and the VIX futures are trading at healthy premiums to VIX.

In summary, we are maintaining a “core” bullish position, and we will trade other confirmed signals around that. 

New recommendation: Potential MVB sell signal

As noted in the market commentary above, SPX has fallen below its +3σ “modified Bollinger Band.”  That creates a “classic” mBB sell signal. But further confirmation is needed to generate a full-fledged McMillan Volatility Band (MVB) sell signal. Specifically, in this case, SPX needs to trade at 4533 or lower.

IF SPX trades at 4533 or lower, then buy 1 SPY Jan (19th) at-the-money put and Sell 1 SPY Jan (19th) put with a strike price 20 points lower.

If this position is taken, then the MVB sell signal will have a target of the lower -4σ Band, and it would be stopped out by a close above the +4σ Band. As with all of our spread positions, this one should be rolled (down) if SPX trades at the lower strike.

New put recommendation: Goldman Sachs Group (GS)

The weighted put-call ratio of GS

has generated a sell signal. The stock seems to be having trouble extending recent gains, but that alone is not enough to take a bearish position. However, if it falls below support at 330 and closes the gap there, then the sell signal can be heeded.

IF GS closes below 329, then buy 1 GS Jan (19th) 330 put and Sell 1 GS Jan (19th) 305 put

GS: 342.38

GS options are not expensive, so this spread should cost about five or six points. If the position is taken, we will hold as long as the GS weighted put-call ratio is on a sell signal.

Follow-up actions: 

All stops are mental closing stops unless otherwise noted.

We are using 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 3 XLE Dec (15th) 85 puts:  we will hold as long as the weighted put-call ratio of XLE
remains on a sell signal. 

Long 1 expiring SPY
Dec (1st) 456 call: Bought in line with the CBOE Equity-only put-call ratio buy signal. It has been rolled up several times. Now, roll out to the Dec (29th) 456 call. Roll the call up if it becomes at least 8 points in-the-money. We are holding without a stop for now. 

Long 3 ES

Dec (15th) 60 calls: We will hold this position as long as the weighted put-call ratio chart for ES remains on a buy signal. 

Long 4 expiring XLP
Dec (1st) 68 calls:  roll to the Dec (29th) 70 call. The stop remains at 68.80.

Long 1 SPY Dec (8th) 457 call: This position was initially a long straddle. It was rolled up this week from the 449 strike, when SPY traded at 457. Now, roll out to the Dec (29th) 457 call. Continue to roll the call up if it becomes eight points in the money. This is, in essence, our “core” bullish position.

Long 5 AVPT

Dec (15th) 7 calls: The trailing closing stop remains at 7.75.

Long 2 TECH

Jan (19th) 60 calls: We will hold as long as weighted put-call ratio is on a buy signal.

Long 4 KHC

Jan (19th) 32.5 calls: We will hold as long as weighted put-call ratio is on a buy signal.

Long 2 IWM
Jan (19th) 178 calls: This is our post-Thanksgiving seasonal position. We will hold without a stop, since this is a rather long seasonal period extending through the first two trading days of 2024. Roll up if the call becomes six points in-the-money (i.e., at 184).

All stops are mental closing stops unless otherwise noted.

Send questions to:

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.

©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. 

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