By Lawrence G. McMillan
The stock market, as measured by the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.18% , continues to struggle mightily with resistance at the all-time highs — roughly 4238.
SPX has had a daily high very near that level for four days in a row, and for seven times in the last month. Internal indicators are improving, but unless the most important indicator — price — can confirm, we are not aggressively buying.
A breakout to new all-time highs, on a two-day closing basis (i.e., SPX must close at a new high above 4238 for two days in a row) would be a major development and would require the addition of long positions.
However, as long as this resistance holds, the bears have a fighting chance to knock the market back down to the low end of its now-two-month-long trading rage: 4060. Below that, there is support at 4000 and 3870, but for now the 4060 area is important because if it gives way, that would be a major, negative disappointment.
Ironically, the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY +0.17% has made a couple of new all-time highs on an intraday basis in the last week. The difference is when the dividends are paid by SPY versus SPX stocks. A positive internal development is that the Russell 2000 Index /zigman2/quotes/210598147/delayed RUT +0.15% has gotten much stronger and is also right on the verge of breaking out to new all-time highs. That is one of the improvements in the internal indicators of which I was speaking.
For the record, the McMillan Volatility Band (MVB) sell signal of May 11 is still in effect.
Equity-only put-call ratios have moved lower over the past week, and both indicators (the standard and weighted ratios) have issued buy signals as a result. There has been very heavy call buying, as the meme stocks — and others influenced by coordinated social media buying — have exploded in many cases once again. As long as these put-call ratios are declining, that is bullish for the stock market. Thus, these new buys signals are another improvement in the internal indicators.
Breadth has been strong and improving. Thus, both breadth oscillators remain on buy signals. They have moved into modestly overbought territory, which is a good thing when SPX is breaking out to new highs (well, almost breaking out). As such, the breadth oscillators can withstand a day or two of negative breadth without necessarily rolling over to sell signals. Moreover, the cumulative breadth indicators have made new all-time highs on eight of the last ten trading days.
New 52-week highs are completely dominant over new 52-week lows once again. In fact, on the New York Stock Exchange, new 52-week lows are back in the single digits. This indicator remains bullish for stocks.
Volatility remains generally bullish in its outlook for the stock market, as well, although the CBOE Volatility Index /zigman2/quotes/210598281/delayed VIX +1.23% is stubbornly holding above 16. The VIX “spike peak” buy signal of May 21 remains in place, and the general trend of VIX is lower. However, there are apparently enough traders still worried about the downside that they continue to buy SPX puts, which in turn keeps VIX somewhat inflated. This is a minor negative factor, but it should still be noted.
The construct of volatility derivatives is also a bullish factor for the stock market. The front-month VIX June futures expire next week. The July futures are trading with a very large premium to VIX (roughly 3.00 points), and the term structure of the VIX futures slopes upward through November. The CBOE Volatility Index term structure slopes upward too.
In summary, there are buy signals and improving indicators nearly everywhere. However, with confirmation from SPX, they don’t mean much. At this point, straddle buys are still a smart move, although a two-day close above 4238 by SPX will be an “all-clear” for a strong move to the upside.
New recommendation: Covanta Holding
Rumors circulated that Covanta Holding Corp. /zigman2/quotes/206457457/composite CVA +0.05% was considering strategic alternatives, including the possible sale of the company. The stock gapped higher, accompanied by very strong and improving stock volume patterns, while option volume exploded to about ten times normal.
Buy 6 CVA July (16) 17.5 calls at a price of 1.00 or less.
CVA: 17.60 July (16) 17.5 call: offered at 1.00