The S&P 500 index has seemingly run out of gas after reaching new all-time highs. It is now testing support near the 4700 level.
As has been the case for a while, market internals are not strong, as the big-cap stocks are leading the way while small-caps struggle. In fact, the Dow Jones Industrial Average DJIA,
When SPX broke out to new all-time highs at the end of 2021 and the beginning of 2022, it left behind support at 4700 – the area of the old highs. That level is now being tested.
If SPX should close below 4690, say, then it would return to the old trading range (the yellow area marked on the accompanying SPX chart). That would not be completely bearish because that trading range has support at the 4500 level, but it would negate the positive aspect of the SPX chart that exists now.
The equity-only put-call ratios, meanwhile, remain on the buy signals that were generated in late December. As long as they continue to fall, that is bullish for stocks. Both the standard and the weighted put-call ratio buy signals are confirmed by the computer analysis programs that we use to analyze these charts.
Market breadth has become a problem once again. The breadth oscillators had generated buy signals on Dec. 22, and they have been struggling to maintain that status ever since. Even though SPX was breaking out to new all-time highs, breadth has been deteriorating over the past week or so.
After the selling on Jan. 5, and the poor breadth that accompanied it, the breadth oscillators have rolled over to sell signals. The last time these oscillators first generated sell signals after an overbought condition was in mid-November, and those were reasonably well-timed signals.
New 52-week highs versus new 52-week lows is another struggling indicator. In terms of NYSE data, new highs continued to maintain a very narrow lead over new lows. But in terms of “stocks only” (i.e., all optionable stocks) or NASDAQ data, the picture is far worse. Since we use the NYSE data as our “official” indicator, it is still clinging to a buy signal, but not by much.
Realized volatility of SPX (specifically, the 20-day historical volatility, HV20) has fallen back to 16% from a high of 21%. That is near the stop-out point for the HV20 sell signal that was generated in late November. But if SPX continues to bounce around like it did on Wednesday, this sell signal could remain in effect.
The VIX “spike peak” buy signal of Dec. 22 is intact, for now. But it would be stopped out if VIX VIX,
Finally, the construct of volatility derivatives remains solidly bullish. It has been the most bullish indicator all along. The VIX futures continue to trade at premiums to VIX, and their term structure slopes upward. The term structure of the CBOE Volatility Indices slopes upward, too. Those are all positive signs for stocks.
There are more seasonal patterns coming soon (see the Market Insight section), but at the current moment, none are in effect – after the Santa Claus Rally successfully concluded its run again this year.
In summary, as long as SPX continues to close above 4690, its chart remains bullish, and we would maintain a “core” long position along with that outlook. However, a slip back into the trading range (4500 – 4700) would alter that. In any case, we will continue to take positions in line with confirmed signals from our indicators, whether bullish or bearish.
As noted previously, Pfizer PFE,
Buy 2 ARNA Feb (18th) 90 calls
At a price of 4.00 or less.
ARNA: 92.97 Feb (18th) 90 calls: 4.00 bid, 5.50 offered
As noted above, the breadth oscillators have generated sell signals again. We are going to make this a conditional recommendation, though, because we want to see some (more) confirmation from SPX before acting on this sell signal:
IF SPX closes below 4690,
THEN buy 2 SPY Jan (28th) at-the-money puts
And sell 2 SPY Jan (28th) puts with a striking price 25 points lower.
The Santa Claus Rally seasonal period closed with a decent gain of 68 SPX points, or about 1.4% – in line with the average gain for this seasonal trade. However, the post-Thanksgiving trade (Nov. 24, 2021 through Jan. 4) showed widely disparate results, depending on whether one looks at the S&P or the Russell 2000 index. SPX gained almost 2% over that period, while RUT lost 2.8%. In most years, RUT outperforms over that time frame, but not this year. That internal distress in the market persists – as shown by this difference in performance of SPX and RUT.
Looking forward, there are more seasonal patterns in January. First is the “January Defect,” a period in which the NASDAQ-100 usually declines. This begins a week from now, normally on the 12th trading day of January. It is then immediately followed by what we call the January Seasonal Buy signal, which occurs at the end of the 18th trading day of January and overlaps into early February. It is not quite as strong and successful as the October Seasonal buy signal but is comparable.
All stops are mental closing stops unless otherwise noted.
Long 2 CMS Jan (21st) 65 calls: This purchase was based on the weighted put-call ratio buy signal in CMS Energy CMS,
Long 3 IWM Jan (21st) 232 calls: This is the year-end seasonal bullish trade, which is off to a poor start. For now, continue to hold without a stop. The year-end seasonal period ended strongly, but not strong enough to recover the losses here. Sell these calls now to exit the position.
Long 2 SPY Jan (21st) 471 calls and short 2 SPY Jan (21st) 481 calls: This was our “trading range” spread. We took profits on half of this trade when SPX traded below 4600 on the opening on Dec. 20. Then on Dec. 23, when SPX closed above 4712, we stopped out the put spread and reversed into the current call bull spread. This is our “core” long position. Stop yourself out if SPX closes below 4690.
Long 1 IWM Jan (seventh) at-the-money call: This was bought in line with several buy signals that were in effect: (VIX “spike peak,” “oscillator differential,” and breadth oscillators). The only one still in effect is “spike peak” – barely. So, sell these calls to close out this trade.
Long 2 EMN Jan (21st) 120: Hold without a stop while these takeover rumors play out.
Long 1 SPY Jan (seventh) 467 call and short 1 SPY Jan (seventh) 477 call: This was bought in line with the breadth oscillator buy signal on Dec. 22. The breadth oscillators have now reversed to sell signals, so close out this spread.
Long 0 SPY Jan (seventh) 469 call: This was our Santa Claus Rally position, and half the calls were sold on Dec. 27, when SPY traded above 474. The remaining calls were sold at the close of trading on the second trading day of the new year, so Jan. 4.
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.
The group, drawn from the S&P 500, features low volatility and solid sales growth over the past year.
Lawrence G. McMillan is a columnist for MarketWatch and editor of the “MarketWatch Options Trader” newsletter. He is president of McMillan Analysis, an investment and commodity-trading adviser.