Stocks need to hold any gains after the Fed rate cut or the S&P 500 is at risk

By Lawrence G. McMillan

Market giving mixed signals; new trading positions include Airbnb

The S&P 500 Index (SPX) SPX fell back after Wednesday's Federal Reserve half-percentage-point rate cut, unable to hold new highs. This is not welcome action in a market that is already overbought.

The bulls now look ready to take another shot at new U.S. stock-market highs. A S&P 500 close well into new all-time high territory would be extremely bullish and eliminate worries. On the other hand, a decline from this level would be the third in the past three months. Considering that the other two were steep declines (although relatively short-lived as it turned out), the downside potential could be large. In addition, there is some negative seasonality about to unfold, which also won't help the bulls.

SPX has resistance in the 5,670-5,680 area, where the highs of both July and September were made. Current market action is shown as a red bar on the accompanying SPX chart. A pullback from here would find potential support at 5,560 and likely better support at 5,400 - the early September lows. A close below 5,370 would be highly negative.

The McMillan Volatility Band (MVB) buy signal of August 12 is still in effect. Equity-only put-call ratios are beginning to diverge from one another. The standard ratio continues to decline, and it is thus still on a buy signal. On the other hand, the weighted ratio has edged slightly higher over the past four days. The computer programs we use to analyze these charts are saying that the weighted ratio is now on a sell signal - it has formed a local minimum and will begin to rise from here (marked with a green "S" on the weighted put-call ratio chart). We don't have many negative signals at this time, but this is one of them.

Market breadth has been strong, with advances leading declines for eight consecutive trading days until Wednesday, when this reversed. The breadth oscillators remain on buy signals and are deeply overbought. They could withstand at least two and maybe three days of negative breadth before rolling over to sell signals.

New highs on the NYSE have risen to extraordinary heights, nearly reaching and even exceeding 400 issues on each of the past four trading days through Wednesday. That is a very positive statistic, and it keeps this indicator strongly on a buy signal. New lows would have to exceed new highs on the NYSE for two consecutive days before this buy signal would be stopped out.

Realized volatility - as measured by the 20-day historical volatility of SPX (HV20) - has pulled back to 14%, moving this indicator into a neutral state. A high level of realized volatility is potentially dangerous for stocks, but this indicator peaked at 23% a few weeks ago and has now pulled back, so it is is no longer a negative.

Meanwhile, market volatility, as measured by the VIX VIX, continues to give mixed signals. The "spike peak" buy signal remains in effect. We are tightening the stop on this signal, so that it would be stopped out if VIX were to rise at least 3.0 points in any three-day or shorter time frame, using closing prices. That is, it would be stopped out if VIX were to return to "spiking" mode.

At this time, the buy signal is still in effect. Yet the "trend of VIX" sell signal is also still in place. That would be stopped out if VIX were to close below its 200-day moving average (MA), but it has not come close to that. The 200-day moving average is currently at 14.80 and rising slowly.

The construct of volatility derivatives remains generally bullish for stocks. The term structures slope upward with the exception of the November "election bump" in the front end of the VIX futures term structure. That is, traders are paying up for SPX options that expire on November 15, because they expect the stock market to be volatile after the election. That is not usually the case, but apparently traders are convinced it will happen this year.

As noted above, a seasonally negative trade is setting up (see the Market Insight section) and will go into effect at this Friday's close.

In summary, we are going to continue to trade confirmed signals as they appear. We will also roll deeply in-the-money options to take partial profits and reduce risk.

Market insight: September expiration season

Several seasonal trades take place from late September through late January. This is the first of them, and it is a simple one: "Sell the market at the end of September option expiration week, and cover a week later."

What that means is to sell the market at the close of trading on the third Friday of September. The rule was created back when options expired only one day per month. Now they expire every day. We will trade this by buying puts on SPY SPY.

At the close of trading on Friday, Sept. 20, buy 2 SPY (Oct. 4) at-the-money puts In line with the market.

Sell the puts to exit the position one week later, at the close of trading on Friday, Sept. 27. If the puts should become eight points in-the-money at any time, roll down to the at-the-money strike, staying in the Oct. 4 expiration. For example, suppose SPY is initially near 560. You buy SPY (Oct. 4) 560 puts and later in the week, SPY trades at 552. You should sell the puts you own and buy the SPY (Oct. 4) 552 puts at that time.

New recommendation: APA Corp. (APA)

A new MVB buy signal has been registered in APA (APA). The target now is the +4<SIGMA> Band, which is currently at 29 and declining.

Buy 6 APA (Oct. 18) 25 calls in line with the market.

We will stop out this position if APA falls back and closes below the -4<SIGMA> Band, which is currently at 24 but declining. NOTE: There are APA1 options, representing the cash dividend paid by APA back in April; do not buy those.

New recommendation: Airbnb (ABNB)

An upside breakout has occurred here, which seems to be a strong technical pattern. There is also a put-call ratio buy signal in effect in Airbnb (ABNB), although that is not really the main impetus for this trade.

Buy 2 ABNB (Oct. 18) 120 calls in line with the market.

Stop out if ABNB falls and closes below $118.

New recommendation: Walgreens Boots Alliance (WBA)

This a longer-term potential buy signal from Walgreens Boots Alliance (WBA). We are keeping this recommendation open but will not continue to re-print the reasoning behind the trade, other than to say that stocks that have been removed from the Dow Jones Industrial Average DJIA usually experience a strong rally within a matter of weeks after that removal.

We are retaining the same entry points as last week: If WBA closes above 9.80, then buy 2 WBA (Oct. 11) 9.5 calls, in line with the market.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a standard rolling procedure for our 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 2 expiring FIVE (FIVE) (Sept. 20) 65 puts: Do not replace them.

Long 2 expiring AKAM (AKAM) (Sept. 20) 100 calls: Do not replace them, since the put-call ratio has rolled over to a sell signal.

Long 1 expiring SPY (Sept. 20) 512 put and short 1 SPY (Sept. 20) 470 put: This put spread is based on the trend of VIX sell signal and would be stopped out if VIX closes below its 200-day MA for two consecutive days. The trend of VIX sell signal is still in place, so sell these puts if you can and replace this spread with the following: Buy 1 SPY (Oct. 11) 550 put.

Long 1 SPY (Oct. 18) 553 call and short 1 SPY (Oct. 18) 573 call: This spread was bought at the close of trading on Aug. 15, when NYSE new highs numbered more than 100 for a second consecutive day. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.

Long 3 expiring CMG (CMG) (Sept. 20) 52 calls: Roll to the CMG (Oct. 18) 57 calls. We will hold as long as the weighted put-call ratio of CMG remains on a buy signal.

Long 1 SPY (Oct. 18) 559 call and long 1 SPY (Oct. 18) 549 put: This is a long straddle, intended to capture a large move in either direction. The puts were rolled down 10 points on Sept. 5, when SPY traded at 549. Continue to roll either side if it gets 10 points in-the-money; alter the strike, not the expiration date.

Long 2 AOS (AOS) (Oct. 18) 80 calls: We will hold these calls as long as the weighted put-call ratio remains on a buy signal.

Long 1 SPY (Oct. 18) 550 call and short 1 SPY (Oct. 18) 570 call: This was bought in line with the latest VIX "spike peak" buy signal of Sept. 5. Stop out if VIX rises 3.0 points or more over any three-day or shorter time frame, using closing prices; that would currently make the stop a close at 19.56 or higher. Otherwise, we will hold for 22 trading days.

Long 10 WEAT WEAT(Oct. 18) 5 calls: These were bought because of the put-call ratio buy signal in wheat futures. We will continue to hold as long as that buy signal is in effect.

Long 2 PDD (PDD) (Oct. 18) 95 calls: These were bought because of the MVB buy signal in PDD. We are essentially holding with a stop since the +/-4<SIGMA> bands are far removed from current prices.

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

Disclaimer:

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09-19-24 0924ET

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