By Lawrence G. McMillan
The stock market, as measured by the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.01% , has had trouble holding breakouts to new highs.
Seven times this month, it has probed above 4705 points — including what seemed to be (at the time) a strong move to 4743 on Nov. 22. But each time, it has fallen back to close below 4705. As a result, that is a resistance area until SPX can close above that level. There is support at 4630.
The ”classic” modified Bollinger Band sell signal remains in effect, but a full-blown McMillan Volatility Band (MVB) sell signal will not take place until SPX closes below 4630.
Both equity-only put-call ratios remain strongly on a sell signals. This is now obvious to the naked eye, after the computer analysis programs “called” these sell signals last week. They will remain bearish until they roll over and begin to trend downward again.
Breadth has been quite negative lately, but surprisingly not very negative yesterday (Nov. 23), when SPX was down sharply for most of the day. The breadth oscillators remain on sell signals, but a couple of days of positive breadth could easily generate a buy signal. Cumulative breadth indicators, meanwhile, are not near all-time highs, having backed off over the past couple of weeks.
New 52-week lows on the NYSE took charge over new 52-week highs. So this indicator is now on a sell signal, too. It will continue to be until new highs lead new lows for two consecutive days. As has been the case for some time, “stocks only” and Nasdaq data show a much more negative situation as new lows are dominating there.
VIX seems to be trying to rally, but it is not “spiking.” It’s oozing upward. As a result, even though VIX is above its 200-day moving average, we do not consider this to be a sell signal. A sell signal would be generated if both VIX and its 20-day moving average closed above the 200-day MA. The construct of volatility derivatives continues to be positive, as the VIX futures are trading at a premium to VIX, and the term structure slopes upward.
Finally, we are now on the brink of a seasonally bullish period — which we trade with IWM /zigman2/quotes/209961116/composite IWM -0.25% options (see the Market Insight section). IWM has been the worst-performing index this month, but that means we won’t be paying up for it when we buy calls this afternoon. Last year, IWM had a very strong December.
Overall, we retain the “core” bullish position, even though SPX is struggling and its internal indicators (breadth, put-call ratios, and new highs vs. new lows) are all on sell signals. A close below 4630 would change that bullish stance. Meanwhile, we will continue to trade confirmed signals around that “core” position, as they take place.
New conditional recommendation: MVB sell signal
A McMillan Volatility Band (MVB) sell signal is a re-confirmation of the “classic” modified Bollinger Band sell signal. The “classic” signal has occurred, so now we are merely looking for the confirmation, which will come on an SPX close below 4630.
IF SPX closes below 4630,
THEN Buy 1 SPY Dec (17) at-the-money put
And Sell 1 SPY Dec (17) put with a striking price 20 points lower.
If this MVB sell signal is confirmed, it would then be stopped out by a close above the +4σ Band. We will update that condition weekly.
Market Insight: Post-Thanksgiving buy signal
Thanksgiving sets off a number of seasonal patterns, although we combine several of them for one trade. The three main seasonal patterns are:
1. Post-Thanksgiving bullishness: buy the market at the close of the day before Thanksgiving and hold into mid-December.
2. The January effect: which used to take place in January, but because of traders front-running the system, it now takes place in December. Small caps outperform big caps during this time, so buy the small-cap indices (Russell 2000 – RUT; IWM, for example).
3. The Santa Claus rally, which encompasses the last five trading days of one year and the first two trading days of the next year.