Stock buyers are keeping S&P 500 momentum strong and volatility low - for now

By Lawrence G. McMillan

A low VIX is an overbought condition, but it is not a sell signal

The S&P 500 index SPX is at all-time highs once again and the bulls are accelerating the move higher. After a favorable interpretation of the consumer-price index figures on Wednesday, the S&P 500 gapped to its latest round of new intraday and closing all-time highs. Even a somewhat lukewarm outcome of the Federal Reserve's FOMC meeting later that day, which was followed by some sell programs, couldn't deter the onslaught of overall buying. Our indicators have remained mostly positive throughout this phase, and they are still in bullish mode - although overbought conditions are appearing, as one might expect with a rally of this strength.

The S&P 500 had several days with a low near 5,330, so that is the first support area. Just below this is the support area that we've mentioned recently, from 5,260 to 5,325. A good deal of work was done in that area during the second half of May, so it should be strong support. A move below 5,260 would be negative and would call for some bearish adjustments. But that doesn't seem at all likely currently, as the bullishness of the SPX chart calls for us to maintain our "core" bullish position.

Our lone sell signal is from the McMillan Volatility Band (MVB) indicator, which generated a sell signal on May 30. That sell signal would be stopped out if SPX closes above its 4<SIGMA> "modified Bollinger Band" (mBB). SPX traded above that Band on June 12 but did not close above it yet.

A much more bullish picture is painted by the equity-only put-call ratios, which continue to decline. That is bullish for stocks as long as it lasts. Their buy signals were generated near the first of May. Now, the ratios have reached the lower areas of their charts. The weighted ratio is currently at the lowest levels since late 2021, near the end of that bullish phase and just before the beginning of the 2022 bear market. Even so, these indicators will remain bullish for stocks until they roll over and begin to rise.

Meanwhile, market breadth has been just strong enough to preserve the buy signals that our breadth oscillators first generated on May 31. I certainly wouldn't say breadth has been spectacular, and it is somewhat concerning that the breadth oscillators haven't expanded into overbought territory as well. However, the buy signals remain intact for now.

New lows on the NYSE twice outpaced new highs, but only by a few issues and not on consecutive days. So, the bullishness of this indicator remains in place. This buy signal would be stopped out if new lows exceed new highs on the NYSE for two consecutive days.

VIX VIX continues to wander around at low levels. A low VIX is an overbought condition, but it is not a sell signal. Thus, the trend of VIX buy signal for stocks remains in place. That buy signal would be stopped out if VIX were to close above its 200-day moving average, which is currently at about 14.60 and slowly declining. That would be the first sign of trouble from the VIX chart. Otherwise, it remains in a bullish state for stocks.

The construct of volatility derivatives remains bullish in its outlook for stocks, too. The term structures slope mostly upward (except for days just ahead of potentially major market-moving events such as the one this week, when both CPI and FOMC occurred on the same day). Moreover, the VIX futures are trading at healthy premiums to VIX.

The sum of the indicators is overwhelmingly bullish. There is one sell signal (MVB), and we currently do not have a "spike peak" buy signal working. Otherwise, they are all in various stages of bullishness - some overbought and potentially capable of generating sell signals, and some just solidly bullish. We are thus maintaining a "core" bullish position, but we will trade any other confirmed signals around that "core" position.

Market breadth and the market itself

When there is a divergence between the cumulative breadth indicators and the stock market itself (SPX), it sometimes warns of a major market top. We follow cumulative volume breadth (CVB), but the same sort of thing can be seen with simple cumulative breadth indicators. CVB last set an all-time high on May 20, along with SPX. Since then SPX has gone on to new closing highs five times; CVB has not set a new all-time high yet (although it is close to doing so). So, that is a minor short-term divergence, and too short of a time to be a true warning sign.

The graph above shows CVB over the past couple of years. On the left is the divergence that developed in late 2021 and early 2022. One can see that the yellow line (CVB) was trending lower, while the white line (SPX) was still trending higher. That was a true warning sign, as it preceded the bear market of 2022.

On the far right-hand side of the same graph, one can see the current divergence. Once again, the white line (SPX) is trending higher, but the yellow line (CVB) is not quite back to its highs. The divergence on the right is a small one compared to the one in late 2021. Yes, it may develop into a more concerning divergence, but for now it is just a small one that could easily be erased by one very strong day of CVB.

New recommendation: Innodata Inc. (INOD)

Both stock and option volume have increased as Innodata (INOD) presses to new all-time highs. This recommendation is based strictly on that strength of volume and price movement.

Buy 4 INOD (July 19) 16 calls at a price of 2.20 or less.

New recommendation: Walgreens Boots Alliance Inc. (WBA)

There's a longer-term potential buy signal from Walgreens Boots Alliance (WBA). We are keeping this recommendation open but will not continue to reprint the reasoning behind the trade. A McMillan Volatility Band (MVB) buy signal will occur if WBA trades at 16.71 or higher (yes, the MVB system can be used on any chart), so we are going to take a small position if that happens and then move to a full position if WBA can continue to rally.

If WBA trades at $16.71 or higher, then buy 2 WBA (July 12) 16.5 calls in line with the market.

If WBA closes above $19.50, then buy 2 WBA (July 12) 20 calls in line with the market.

As with any MVB recommendation, the purchase of these 16.5 calls would be stopped out if WBA were to close back below its -4<SIGMA> Band.

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.

Long 4 RSI (RSI) (June 21) 7.5 calls: The stop remains at 8.30.

Long 3 AEYE (AEYE )(June 21) 25 calls: Keep the stop at 20.50.

Long 3 USO USO (June 21) 76 puts: We will hold these puts as long as the put-call ratio is on a sell signal.

Long 1 SPY (June 21) 543: We originally bought a spread in line with the new highs vs. new lows buy signal. Last week, we sold the spread and replaced it with a simple long 535 call. That call was rolled up to the 543 strike on June 12. This trade would be stopped out if NYSE new lows exceed NYSE new highs for two consecutive days.

Long 2 LW (LW) (June 21) 82.5 calls: We will hold these calls as long as LW remains on a weighted put-call ratio buy signal.

Long 3 BL (BL) (June 21) 47.5 puts: Lower the trailing stop to 49.

Long 1 SPY (July 19) 522 put and Short 1 SPY (July 19) 497 puts: This put bear spread was bought in line with the MVB sell signal, which occurred on May 30 when SPX traded at 5,228. It will be stopped out if SPX closes above the +4<SIGMA> Band, which is currently at about 5,390 and rising. Its target is the -4<SIGMA> Band, which is currently 5,160 and moving sideways.

Long 3 INSG (INSG) (June 21) 9 calls: Stop out of this position if INSG closes below 6.80.

Long 1 SPY (June 21) 543 call: Last week, we bought the 535 call as our "core" bullish position. The call was rolled up to the 543 strike on June 12.

Long 5 CORZ (CORZ) (July 19) 7 calls: Set a trailing, closing stop at 6.50.

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

(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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06-15-24 0913ET

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