By Lawrence G. McMillan
An index close above 5,990 would be a bullish catalyst for a summer stock-market rally
The S&P 500 index SPX is struggling to move above the downtrend line that connects its February and May highs. If the benchmark can engineer this breakout, that would be very bullish for stocks, and the next target would be the benchmark’s all-time high at 6,150. A close above 5,990 would be very positive in that regard.
That downtrend line is shown in red on the SPX chart below. It looked like SPX was going to be able to break out on June 4, but it fell back late in the day and now possibly looks like just another failed breakout attempt.
There is support in the 5,700-5,800 area (blue lines on the chart). There are also three gaps on the chart (circled on the chart). If the first two were filled, the bulls could still make a case for higher prices, but if that third one – down at 5,300 – were filled then that would be a new bear-market leg. I don’t expect to see that lowest one filled anytime soon.
The McMillan volatility band (MVB) sell signal is still in place. Its target is the -4<SIGMA> “modified Bollinger band,” which is currently at 5,650 for SPX and rising rapidly. This sell signal would be stopped out if SPX were to close above the +4<SIGMA> band, which is at 6,100 and rising.
Read: The two rules investors need to follow right now as the S&P 500 eyes a return to 6,000
The market’s internal indicators are mixed – but are more bullish than bearish.
Equity-only put-call ratios continue to be bullish for the stock market. The ratios are dropping, and, as long as they are trending lower, their buy signals for stocks will be intact. The weighted ratio moved sideways for a few days but is now declining once again. These will only generate sell signals if they roll over and begin to trend higher.
Stock-market breadth has still not been stellar, although it is improving. The NYSE-based breadth oscillator remains on a sell signal, while the “stocks only” oscillator has just recently seen its sell signal stopped out. So, these two are odds right now. That won’t last long. If breadth should improve strongly as SPX makes a run toward an all-time high, that would be strongly bullish.
Cumulative volume breadth (CVB) has been making new highs on several days over the past few weeks. This is a buy signal in that it indicates that SPX will also follow along to a new all-time high, as well. In fact, CVB has made a new all-time on both of the last two trading days. That is in “stocks only” terms. In NYSE terms, it made a new high recently, but not on these last two days. This is a longer-term bullish indicator.
New highs continue to outnumber new lows, but not by enough to generate a confirmed signal from this indicator. New lows have practically dried up, with just nine issues making new lows on the NYSE on June 4, but new highs have not yet numbered 100. It would take new highs numbering 100 or more for two consecutive days in order to confirm a buy signal here.
The differential between implied volatility VIX and realized volatility, or HV20 (the 20-day historical volatility of SPX), remains subdued, so the long-term buy signal in place from this indicator is still bullish.
The VIX itself has been declining and is now below 18. This has several potential ramifications. First, the “spike peak” buy signal of May 23 remains in place. But now it’s possible that a longer-term buy signal will emerge here, too, although it’s just a bit early to confirm it. If both VIX and its 20-day moving average are below the 200-day moving average, that is a VIX-trend buy signal. As one can see from the box on the lower right of the accompanying VIX chart, the 20-day has now just crossed below the 200-day. If that is confirmed by a two-day close, then the buy signal will result.
Finally, the construct of volatility derivatives is mildly bullish in its outlook for stocks. The term structure of the Cboe volatility indices is definitely bullish, since it slopes rather steeply upward. But the term structure of the VIX futures is only modestly bullish, since its slope is modest and only in the front end of the curve.
Summarizing, we have several buy signals in place, with only a couple of sell signals. This is enough evidence to adopt a slightly bullish outlook for stocks, but we will continue to trade all confirmed signals. In addition, be sure to roll deeply in-the-money options as they arise.
New recommendation: Potential trend of VIX buy signal
As noted above, VIX is below its 200-day moving average, and now the 20-day moving average of VIX has just crossed below the 200-day as well. If that condition persists for two consecutive trading days, it is a trend-of-VIX buy signal for the stock market.
We will use a conditional entry: If VIX closes below 18 on June 5, then buy 1 VIX (July 18) at-the-money call and sell 1 VIX (July 18) call with a striking price 20 points higher.
If this position is established, stop out on a reversal. That is, if VIX closes back above 21 for two consecutive days, then exit this position.
New recommendation: Tapestry Inc. (TPR) puts
A new put-call ratio sell signal has emerged in TPR (TPR), but we want to see the stock break down below support before taking a position.
If TPR closes below $76, then buy 3 TPR (July 18) 75 puts in line with the market.
If bought, we will hold the puts as long as the weighted put-call ratio for TPR 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 SPY 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.
Also, for outright long options, roll if they become 8 points in-the-money.
Long 2 APH (June 20) 80 calls: Technically, the put-call ratio for APH (APH) has rolled over to a sell signal, but the stock is strong. So, we are going to continue to hold the calls but are now going to be using a trailing stop. Raise the closing stop to 87. Roll up again at 90.
Long 8 expiring IEF IEF (June 6) 93.5 puts: Roll to the IEF (July 18) 93.5 puts. We will hold this position as long as the weighted put-call ratio for U.S. Treasury notes remains on a sell signal.
Long 1 TSEM (July 18) 42 call: The long calls were rolled up when TSEM (TSEM) traded above $42 on May 14. Roll the calls up again at 50.
Long 1 SPY (Jun 20) 591 call and short 1 SPY (June 20) 620 call: This the position based on the equity-only put-call buy signals. It was rolled up when SPY traded at 591 on May 15. These buy signals are still in effect. We will update their status weekly.
Long 2 DLR (June 20) 170 calls: DLR (DLR) traded at $170 this week, so the calls were rolled up. We will hold as long as the DLR weighted put-call ratio is on a buy signal.
Long 5 CCL (CCL) (July 18) 20 calls: We will hold as long as the weighted put-call ratio remains on a buy signal.
Long 1 SPY (Sept. 19) 585 call and short 1 SPY (Sept. 19) 635 call: This is the position based on the differential between implied and historical volatility. Continue to hold.
Long 3 IP (IP) (July 18) 50 calls: We will hold as long as the weighted put-call ratio remains on a buy signal.
Long 2 SPY (July 18) 613 calls: This position was bought in line with the cumulative volume breadth buy signal. That signal is still in effect. CVB made another new all-time high on June 3. The target is for SPY to eventually make a new all-time high as well. Hold without a stop for now.
Long 1 SPY (July 18) 576 put and short 1 SPY (July 18) 525 put: This spread is based on the McMillan volatility band sell signal that took place on May 23 when SPX traded below 5,795. The target is for SPX to trade at the -4<SIGMA> band, and the position would be stopped out if SPX closed above the +4<SIGMA> band.
Long 1 SPY (July 18) 590 call and short 1 SPY (July 18) 605 call: This was bought in line with the “spike peak” buy signal. It well be held for 22 trading days, unless stopped out by a VIX close above 25.53.
Long 6 DOUG (DOUG) June (20) 2.5 calls: We will hold without a stop while 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 “Options as a Strategic Investment”. www.optionstrategist.com
-Lawrence G. McMillan
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06-05-25 1552ET
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