Expect the S&P 500 to top 5,200 before it's time to sell

By Lawrence G. McMillan

'The most bullish thing a market can do is get overbought and stay there'

Sell signals have not been confirmed yet - just overbought conditions, and overbought does not mean sell.

The stock market, as measured by the S&P 500 index SPX, registered all-time highs again this week. There was the now-becoming-routine single-day pullback, which left a gap on the S&P 500 (SPX) chart, but it was filled the next day. Yes, the market is overbought - but as the late Alan Shaw (longtime technical analyst at Smith Barney) said, "The most bullish thing a market can do is get overbought and stay there."

Four times in the past seven trading days, SPX has had an intraday low near 5,050, so that is near-term support. The fact that it has held there four times is becoming significant. Below that, there is a gap on the SPX chart down to 4,983 (marked with a circle on the below chart) that is "begging" to be filled. Filling that gap would not be a bad thing. Below the gap are several minor support levels - mostly at the various weekly lows - with the major support area still residing at 4,800.

The +4<SIGMA> "modified Bollinger Band" continues to race away to the upside and is currently at 5,200. Technically, a McMillan Volatility Band (MVB) sell signal would occur if SPX were to fall to 4,903, but that is so far away as to be highly improbable. A more likely scenario would see SPX exceed the +4<SIGMA> Band on the upside and then proceed to set up a new sell signal.

Equity-only put-call ratios are still languishing at low levels, and as long as that is the case, it is bullish for stocks. The standard ratio just made a new relative low. The weighted level just recently was at its lowest since November 2021. It has ticked up a little since then, but for these ratios to turn bearish for stocks, they would have to rise strongly - and they are not. I have placed a "?" on the weighted chart, just to indicate that it is possible that this could be the turning point, but it would take more evidence to confirm that.

Market breadth has generally been just positive enough to avoid a sell signal. So currently, both breadth oscillators remain on buy signals. Breadth has not been terrific, but cumulative volume breadth (CVB) - which is the running total of daily volume on advancing issues minus volume on declining issues - has recently been making new all-time highs along with SPX, so that is a positive sign.

On the New York Stock Exchange, new highs continue to dominate new lows.

On the New York Stock Exchange, new highs continue to dominate new lows. Thus, this indicator remains in a bullish state as well. This buy signal would be terminated if new lows were to exceed new highs for two consecutive days on the NYSE. Otherwise, the indicator will continue to be bullish.

The Cboe Volatility Index VIX has stayed at low levels. That is generally bullish for stocks. It's only when VIX begins to rise that trouble appears for the stock market. Currently, the VIX "spike peak" buy signal remains in effect (green "B" on the accompanying VIX chart).

The trading system that we built around these signals dictates that the buy signal for stocks will be in place for 22 trading days, so it has time to go. This buy signal would be stopped out if VIX were to return to "spiking" mode. Technically, the trend of VIX is still bullish because both VIX and its 20-day moving average are below the 200-day moving average (MA). However, those are all in rather close proximity to each other, so that could reverse quickly. VIX touched the 200-day MA a couple of times this week, and the 20-day MA is now within a point of the 200-day MA.

The construct of volatility derivatives remains bullish for stocks. That is, the term structures of both the VIX futures and of the Cboe Volatility Index continue to slope upward, and the VIX futures are trading at a strong premium to VIX.

In summary, we continue to hold our "core" bullish position because of the positivity of the SPX chart. We will trade other confirmed signals around that but sell signals have not been confirmed yet - just overbought conditions, and "overbought does not mean sell."

New recommendations

For the past couple of weeks, we have made some conditional recommendations that have not been filled: a call buy in APA Corp. (APA), a sell signal from the MVB indicator, and a longer-term potential buy signal from Walgreens Boots Alliance Inc. (WBA)

While these are all technically still valid recommendations, we are keeping them open but will not continue to reprint the reasoning behind the trade. The recommendations themselves are stated below.

1. If APA closes above $32.50, then buy 3 APA May (17th) 32.5 calls in line with the market.

2. If SPX trades at 4,903 or lower, then buy 1 SPY April (5th) at-the-money put and sell 1 SPY April (5th) put with a striking price 25 points lower.

3. If WBA closes above $22.50, then buy 4 WBA June (21st) 22.5 calls in line with the market.

New recommendation: D-Wave Quantum Inc. (QBTS)

This former SPAC came public in May 2021 and immediately plunged to nearly zero. It has recently staged an upside breakout, though, with strong stock and option volume.

Buy 6 QBTS QBTS April (19th) 1 calls at a price of 0.85 cents or less. Stop out on a close below $1.25.

New Recommendation: CSX Corp. (CSX)

There is a new put-call ratio sell signal in CSX (CSX). We would like to see confirmation of that in the form of a close below $37.5 by the stock. The weighted ratio of CSX was recently as low as $35, meaning that $35 was being spent on puts for every $100 being spent on calls - an extremely optimistic reading. Put-call ratios are contrary indicators, so when the ratio turned higher from there, it created a sell signal.

If CSX closes below 37.50, then buy 4 CSX May (17th) 37.50 puts.

If the puts are bought, we will hold them as long as the weighted put-call ratio for CSX remains on a sell signal.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a "standard" rolling procedure for our SPDR S&P 500 ETF Trust (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 4 XLP XLP March (15th) 73 calls: Raise the trailing stop to $73.80.

Long 2 SPY SPY expiring March (8th) 509 calls: This position was initially a long straddle. It was rolled up, and the puts were sold. Now, roll to the March (29th) at-the-money call. This is, in essence, our "core" bullish position. Roll the calls up every time they become at least eight points in-the-money.

Long 1 SPY expiring March (8th) 508 call: Originally this was a long straddle. The put was sold, and the call was rolled up several times. Now, roll to the March (29th) at-the-money call. Roll up every time the call is eight points in-the-money.

Long 3 TLT TLT May (19th) 95 puts: We will hold as long as the put-call ratio sell signal is in place for T-bonds.

Long 1 SPY expiring Mar (8th) 510 call: Bought in line with the new highs vs. new lows buy signal. It was rolled up several times. Now, roll to the Mar (29th) at-the-money call. Stop yourself out if NYSE new lows exceed new highs for two consecutive days. Roll up every time the call is eight points in-the-money.

Long 2 SPY Mar (15th) 508 calls: Bought in line with the most recent VIX "spike peak" buy signal. We will hold for 22 trading days (about one calendar month). Moreover, the trade would be stopped out if VIX subsequently returns to "spiking" mode - that is, if it closes at least 3.0 points higher over any one-, two-, or three-day period (using closing prices in all cases).

Long 4 BKR BKR Apr (19th) 30 calls: Bought when BKR closed above $30, on March 6. Continue to hold as long as the weighted put-call ratio remains 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 "Options As A Strategic Investment." www.optionstrategist.com

(c)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.

-Lawrence G. McMillan

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03-09-24 0644ET

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