According to the S&P 500 Index, the U.S. stock markets have struggled this week, which is usually a bullish season. Yale Hirsch called this the 'Santa Claus rally' 60-years ago. It includes the period between the five last trading days and the two first trading days of each year.
The SPX typically rallies by a little more than 1% over that period. Santa is not active, with the exception of Thursday's strong session. But there is still time. This system has a side effect that if the market does not register a gain in the seven-day period, it will be a negative indicator for the future. Hirsch put it so well: "If Santa Claus fails to call, bears could come to Broad and Wall."
After the December 3900 low, the SPX chart has resistance at 3900-3340. Support has been found in the 3760-3800 region so far. The market is therefore range-bound in the short term. This won't last for too long. Looking longer-term, heavy resistance exists up to 4100. This is the point where the stock market crash occurred in December. There should be support at 3700 and then at the yearly lows of 3500. The bear market is the most prominent picture, with trend lines moving downward (blue lines in accompanying SPX graph).
At this moment, there is no McMillan Volatility Band signal (MVB). SPX must move beyond the +/-4s "modified Bollinger Bands" in order to produce such signals.
Recent heavy put-buying has led to increased put-call ratios. These ratios have been showing sell signals for several weeks. As long as they continue to trend higher, these sell signals will not change. This holds true for all put-calls that we monitor, including the two equity-only ratios shown in the accompanying charts and the total put call ratio. Although the CBOE equity only put-call ratio registered a large number on December 28, there may be arbitrage implications so this number could be exaggerated. The standard ratio is approaching its yearly highs which indicates that it is in oversold territory. Additionally, the weighted ratio has begun to approach oversold levels. But, "oversold" does not necessarily mean buy.
Market breadth has been low, so our breadth oscillators are still on sell signals, even though they are in oversold territory. On two occasions, the NYSE breadth oscillator tried to generate buy signals but failed. The'stocks-only' breadth oscillator failed to generate a buy signal. The differential oscillator of these oscillators is also monitored. It has been a victim to a recent buy signal.
The NYSE has set new 52-week highs, which is a sign that things are improving. The number of new highs on the NYSE has surpassed 60 in the past few days. Although it may not seem like much, it is. However, it is an improvement. To generate a buy signal for this indicator, however, the number and frequency of new highs must exceed 100 for at least two consecutive days. This may seem like a difficult task right now.
The most optimistic area is volatility (VIX). VIX is still in its own world. Although it has increased slightly in the last two days in what appears to be a concession for sharply declining stock price, overall the VIX technical signals are still bullish on stocks. The trend of VIX's buy signal is still active and a spike peak buy signal exists. To cancel the trend of VIX's buy signal, VIX must close above its 200 day moving average (currently at 25,50 and declining), and above 25.84 (the spike peak in mid-December) for the'spike peak buy signal.
In its outlook for stocks as well, the construct of volatility derivatives is bullish. Both the VIX futures as well as the CBOE Volatility Indicces term structures slope upward. The VIX futures trade at healthy premiums to VIX. These are all positive signs for stocks.
We remain a core bearish position because of the downtrend in the SPX chart, and the recent fall below 3900. Negative signs are also seen in breadth and put-call ratios (although both are oversold). The volatility complex is the only source of current buy signals. We will trade the confirmed signals from that 'core position' as we continue to trade.
New recommendation: Chevron (CVX)
Chevron has a new buy signal for the put-call ratio, which is coming from extreme oversold conditions. We are taking a long position in this situation:
Call 1 CVX February (17th) 180
For as low as 7.20
CVX: 177.35 February (17th) 180 call 7.00 bid, available at 7.20
This position will be held as long as CVX's put-call ratio remains positive.
Unless otherwise noted, all stops are mental closing stops.
Our spreads follow a standard rolling procedure: If the underlying hits the short strike in any vertical bull spread or bear spread then we roll the whole spread. Roll up for a call bull spread and roll down for a bear put spread. If not instructed, stay within the same expiration and maintain the same distance between strikes.
This is our core bearish position. We will continue to hold a position as long as SPX is in a downtrend.
Long 2 KMB Jan (20th), 135 calls: This is based upon the Kimberly-Clark put-call ratio. The ratio has now rolled to a sell signal. You can sell these calls to close your position.
Long 2 IWM Jan (20th), 185 at-the money calls, and Short 2 IWM January (20th)205 calls: This position is based on bullish seasonality. It's the period between Thanksgiving and the first trading day in the new year. This iShares Russell 2000 ETF position will be closed at midnight on Wednesday, January 4th.
This spread was purchased at the close of December 13th when the VIX'spike peak buy signal' was generated. If VIX closes higher than 25.84, you should not be surprised. We will keep the VIX open for 22 trading days.
SPX closed below 3900 on Dec 15th. If SPX closes higher than 3940, you should not be part of this spread.
Long 2 PCAR February (17th) 97.20 put: These Paccar puts were purchased on December 20th. They finally traded at our buy limit. These puts will be held as long as there is a weighted put call ratio on a sell signal.
The trade is based on the seasonally favorable Santa Claus rally time period. This trade is open 24/7, with the exception of time. If SPY trades are at 391, then you can roll the spread up 15 points each way. You should exit your spreads on Wednesday, January 4, (the second trading day in the new year).
All stops are considered mental closing stops, unless noted otherwise.
McMillan Analysis is headed by Lawrence G. McMillan, who is a registered commodity and investment advisor. McMillan could hold positions in securities mentioned in this report both personally and for clients. McMillan is an experienced trader, money manager, and the author of Options as a Strategic Investment. URL
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Disclaimer: LINK Although the information contained in this newsletter was carefully compiled from reliable sources, accuracy and completeness cannot be guaranteed. McMillan Analysis Corporation officers and directors, as well as accounts managed by them, may hold positions in securities mentioned in the advisory.
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