Opinion: The inventory market’s rally was a head pretend and the sensible cash now could be with the bears


The inventory market, as measured by the S&P 500 Index
has fallen under the 4100 degree. That’s vital as a result of there beforehand was triple resistance at that degree, and when SPX broke out above that degree in late January, it appeared as if the following leg of the “new” bull market was underway.

But SPX has not solely fallen under that supposed help degree, it’s confirmed the pullback by buying and selling all the way in which all the way down to 4000. It seems that breakout above 4100 was a false one. These are harmful in bear markets (we final noticed one in January 2022). 

So, now there may be resistance at 4200 (the early February highs), and whereas there could be some small help ranges just under present ranges, the most important help is at 3900, after which 3760-3850. If SPX falls under 3760 (the December low) that may be a particularly damaging improvement.

The McMillan Volatility Band (MVB) promote sign that was issued in early February stays in place. Its goal is the -4σ “modified Bollinger Band” which is at present at about 3920, however is falling.

Fairness-only put-call ratios are starting to weaken as nicely. The weighted ratio is now on a promote sign, based on our laptop evaluation packages (in addition to the bare eye). This promote sign is emanating from a really low (i.e., overbought) degree, and the final two from this degree had been promote indicators in April and August of 2022 — each sturdy promote indicators.

In the meantime, the usual ratio has additionally curled upward, however our laptop evaluation packages usually are not but “saying” that it is a promote sign. This newest rise has a query mark on the accompanying chart.

Market breadth, which had been a stalwart of the bullish indicator on the way in which up in December and January, has weakened significantly. Each breadth oscillators generated confirmed promote indicators as of February 17th. The decline since then has been swift, and breadth has been very damaging, together with one 90% down day. That implies that the breadth oscillators have already reached oversold standing. Nonetheless, the market can decline whereas these oscillators are oversold, so “oversold doesn’t imply purchase.”  We have to anticipate a confirmed purchase sign right here earlier than appearing.

One other indicator that has been bullish for fairly a while is “New 52-week Highs vs. New 52-week Lows.” This purchase sign is in jeopardy of being stopped out, though even when that occurs, a brand new promote sign shouldn’t be essentially in place. On Feb. 22, for the primary time this yr, New Lows outnumbered New Highs on the NYSE. If that occurs once more, this indicator’s purchase sign can be stopped out, and the indicator would return to impartial standing. A promote sign requires that New Lows outnumber New Highs for 2 consecutive days, and that the variety of New Lows is larger than 100 on every of these two days.

The volatility complicated indicators are weakening however haven’t turned bearish but. First, VIX
has returned to “spiking” mode — which means that it has risen greater than 3.0 factors over a three-day (or shorter) time-frame. That’s an oversold situation, and SPX can drop sharply whereas VIX is in “spiking” mode.

Finally, although, a VIX “spike peak” purchase sign can be generated. As one can see from the accompanying VIX chart, latest “spike peak” purchase indicators haven’t labored out all that nicely – save for the sturdy purchase sign close to the October lows. A blue “B” on the chart is a shedding system commerce, whereas a pink “B” is a successful one. Regardless, we are going to act on the brand new purchase sign when it seems.

The development of VIX remains bullish for shares so long as each VIX and its 20-day transferring common are under the 200-day MA. You may see that the 200-day MA is just under 25 and dropping. VIX continues to be nicely under that time.

The assemble of volatility derivatives stays modestly bullish for shares, in that the time period buildings of the VIX futures and of the CBOE Volatility Indices proceed to slope upward. We’re carefully watching the connection between the 2 VIX futures entrance months — March and April. Ought to March VIX futures start to commerce at costs greater than April VIX futures, that may be extraordinarily damaging. To this point, that hasn’t occurred, however the distinction between the 2 has narrowed.

In abstract, the breakdown this week, coupled with promote indicators from the equity-only put-call ratios implies that you need to once more set up a “core” bearish place. Then, indicators from different indicators will be traded alongside that.

New Advice: “Core” bearish place

As famous above, we wish to set up and maintain a brand new “core” bearish place:

Purchase 2 SPY
April (21st) places with a putting value 10 factors out-of-the-money

And Promote 1 SPY April (21st) places with a putting value 30 factors decrease.

So, for instance, if SPY is buying and selling at 400, you’d purchase the SPY April (21st) 390 places and promote the SPY April (21st) 360 places.

Initially, we are going to set a cease to shut out this place if SPX closes above 4200.

New suggestion: Potential VIX “spike peak” purchase sign

As famous above, VIX has returned to “spiking” mode. The very best value that it has reached whereas in “spiking” mode has been 23.63 (to this point).

IF VIX closes at the very least 3.0 factors under the very best value that it has reached from February 22nd going ahead, (at present 23.63),


Purchase 1 SPY April (7th) at-the-money name

And Promote 1 SPY April (7th) name with a putting value 15 factors greater.

Right now, VIX is underneath 22, so it’s potential that this purchase sign may very well be accomplished as quickly because the shut of buying and selling as we speak. (it must fall under 20.63 at as we speak’s shut).

Observe-up motion: 

All stops are psychological closing stops except in any other case famous.

We’re utilizing a “normal” rolling process for our SPY spreads: in any vertical bull or bear unfold, if the underlying hits the quick strike, then roll your entire unfold. That might be roll up within the case of a name bull unfold, or roll down within the case of a bear put unfold. Keep in the identical expiration, and hold the gap between the strikes the identical except in any other case instructed. 

Lengthy 0 SPY Feb (24th) 412 name and Quick 0 SPY Feb (24th) 426 name:  This unfold was purchased when the breakout over 3940 by SPX was confirmed, on the shut on January 12th. It was rolled up on February 1st, when SPY traded at 412. Then it was stopped out when $SPX closed under 4060 on Feb 21st

Lengthy 1 SPY Mar (17th) 410 name and Quick 1 SPY Mar (17th) 425 name: This unfold was purchased in step with the “New Highs vs. New Lows” purchase indicators. It was rolled up on January 26th, when SPY traded at 404, after which it was rolled up once more at expiration. Cease your self out of this place if New Lows on the NYSE exceed New Highs for 2 consecutive days.

Lengthy 0 SPY Mar (17th) 415 name and Quick 0 SPY Mar (17th) 431 name: This commerce was stopped out on February 21st, when $SPX closed under 4020. 

Lengthy 3 XM Mar (17th) 15 calls: Proceed to carry XM
whereas takeover rumors play out.

Lengthy 1 SPY Mar (17th) 410 put and Quick 1 SPY Mar (17th) 385 put: This bear unfold was purchased in step with the McMillan Volatility Band (MVB) promote sign. This commerce can be stopped out if SPX had been to shut again above the +4σ Band. We’ll hold you up to date concerning the place of the MVB every week.

Lengthy 2 CTLT Mar (17th) 70 calls: This takeover rumor continues to be “in play,” though CTLT
inventory has fallen barely. Proceed to carry whereas these rumors play out.

Lengthy 3 MANU
Mar (17th) 25 calls: Maintain with out a cease whereas the takeover rumors play out.

Lengthy 2 GRMN April (21st) 95 places: These had been purchased on February 21st, when GRMN
closed under 95. The subsequent day, the corporate reported better-than-expected earnings, and shares jumped greater. We’ll stay on this place so long as the GRMN weighted put-call ratio stays on a promote sign.

All stops are psychological closing stops except in any other case famous.

Ship inquiries to: lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Evaluation, a registered funding and commodity buying and selling advisor. McMillan might maintain positions in securities beneficial on this report, each personally and in consumer accounts. He’s an skilled dealer and cash supervisor and is the creator of the best-selling guide, Choices as a Strategic Funding. www.optionstrategist.com

©McMillan Evaluation Company is registered with the SEC as an funding advisor and with the CFTC as a commodity buying and selling advisor. The data on this e-newsletter has been rigorously compiled from sources believed to be dependable, however accuracy and completeness usually are not assured. The officers or administrators of McMillan Evaluation Company, or accounts managed by such individuals might have positions within the securities beneficial within the advisory. 


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