The bulls still have what it takes to pull stocks back up

By Lawrence G. McMillan

Volatility is higher and the market is down, but support levels are holding

The stock market, as measured by the S&P 500 index SPX, has pulled back after reaching new highs, turning some pundits inexplicably bearish. But the S&P 500 chart remains strong and positive. The S&P 500's pullback is now within the major support area that extends from 5,050 up to 5,180. A close below 5,050 would perhaps be reason to change that opinion, but for now we are maintaining our "core" bullish outlook.

There has been some deterioration in the market's internals, and that bears watching. First, the equity-only put-call ratios have moved higher and are now at their highest levels in a month. While they are not necessarily "racing" higher, they have moved high enough to confirm sell signals. Of course, this same sort of procedure was taking place back in January and did not amount to much of anything. So, we're taking this as more of a stern warning than a "sell everything and get out of the market" signal.

Also, market breadth has been poor and the breadth oscillators are flirting with another sell signal. We require two-day confirmation of any oscillator signals because of the tendency of whipsaws to occur with the oscillators. That two-day sell signal was confirmed with the trading of April 3.

New highs on the NYSE have continued to occur at a tremendous rate, and they have far exceeded new lows. So, this indicator remains strongly bullish. This bullish signal will only be stopped out if NYSE new lows exceed new highs for two consecutive days.

VIX VIX is higher but still relatively subdued, and that is generally bullish for stocks. There is no trend of VIX signals in place, although we have not had a trend of VIX buy signals in place for some time. Of more concern would be a "spiking" VIX, for stocks can fall sharply while VIX is spiking (although eventually a "spike peak" buy signal would occur). Any trouble would be in the form of a sharply rising VIX from these low levels, not from VIX merely being at low levels.

The construct of volatility derivatives remains bullish for stocks as well. The term structures slope upwards, and VIX futures are still trading with a healthy premium. That premium led us to a buy signal for ProShares Short VIX Short-Term Futures ETF SVXY recently, and that is still in effect since the premium on the VIX futures remains at a fairly large level.

In summary, we are retaining our "core" bullish position, and we will be trading any other confirmed signals around that "core" position.

New recommendations: Recap

For the past few weeks, we have made some conditional recommendations that have not all been filled. The only remaining one at this time is a longer-term potential buy signal from Walgreens Boots Alliance Inc. (WBA) We are keeping this recommendation open but will not continue to reprint the reasoning behind the trade.

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

New recommendation: McDonald's (MCD) puts

McDonald's Corp. (MCD) has broken down to a new low, triggering weighted equity-only put-call ratio sell signals as well as traditional technical-analysis sell signals. This deterioration has been going on for some time, but McDonald's was trying to establish a base for the last couple of weeks. Now, that basing attempt has failed.

Buy 2 MCD May (17th) 275 puts in line with the market.

We will hold this position as long as the weighted put-call ratio 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 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 0 XLP April 5 76 calls: These calls were stopped out when XLP XLP closed below $74.70 on April 3.

Long 2 SPY April 12 520 calls: This position was initially a long straddle. It was rolled up, and the puts were sold. 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 April 12 520 call: This was also originally a long straddle. The put was sold, and the call was rolled up several times. Roll up every time the call is eight points in-the-money.

Long 3 TLT TLT May 19 95 puts: We will hold as long as the put-call ratio sell signal is in place for U.S. Treasury bonds.

Long 1 SPY April 12 520 call: This call was bought in line with the new highs vs. new lows buy signal. It was rolled up several times. Stop 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 4 BKR April 19 30 calls: Bought when Baker Hughes Co. (BKR) closed above $30, on March 6. Continue to hold as long as the weighted put-call ratio remains on a buy signal.

Long 6 QBTS (QBTS) April 19 1.0 calls: The stop remains at $1.75.

Long 3 APA May 17 32.5 calls: We will continue to hold these calls as long as the weighted put-call ratio for APA Corp. (APA) remains on a buy signal.

Long 4 CSX May 17 37.50 puts: Bought when CSX Corp. (CSX) closed below $37.50 on March 14. We will hold these puts as long as the weighted put-call ratio for CSX remains on a sell signal.

Long 2 DKNG (DKNG) May 17 46 calls: Raise the stop to $43.40.

Long 2 SVXY April 19 113 calls: The stop for this position is based on our indicator, and it closed at 0.94. If it falls below 0.50, that would stop out the position. Alternatively, sell the calls if the front-month April VIX futures settle at a discount to $VIX.

Long 4 RSI( RSI) May 17 5 calls: We will hold without a stop initially, in order to let the takeover rumors play out.

All stops are mental closing stops unless otherwise noted.

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 the best-selling book, "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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04-05-24 0553ET

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