The S&P 500 index SPX has stalled just below all-time highs, so the trading range between 6,500 and 6,900 is still intact. A breakout in either direction should result in a strong move. Obviously, SPX is much closer to an upside breakout, and there are some new positive signs from market internals as well as a favorable seasonal pattern.
One standout on the accompanying SPX chart is the wide gap between the modified Bollinger bands (mBB). That's due to realized volatility remaining fairly high since it first exploded back on Oct. 10. There's no McMillan volatility band (MVB) signal in effect at this time.
Equity-only put-call ratios have continued to climb despite the recent rally. As long as these ratios are rising, that is bearish for stocks. The rate of ascent has slowed recently, but these ratios won't generate buy signals until they roll over and begin to decline. The weighted ratio has moved sideways this week, but the computer programs that we use to analyze these charts are still "saying" that the sell signals will remain in effect.
Market breadth is beginning to stall. The stocks-only breadth oscillator remains on a buy signal, but the NYSE-based oscillator is flirting with rolling over to a sell signal. Meanwhile, cumulative volume breadth (CVB) is still some distance from new all-time highs.
New highs on the NYSE have continued to outpace new lows, and the buy signal that was registered on Nov. 26 remains in place. This indicator has flipped back and forth, which is unusual, but at the moment it's bullish.
As noted above, realized volatility is relatively high and that can be a problem for stocks. The 20-day historical volatility of SPX (HV20) is still at 15% - off slightly from its recent highs, but high enough that a great deal of uncertainty (and volatility) is in place in the market.
Implied volatility (VIX) VIX has fallen, and so the VIX "spike peak" buy signal of Nov. 21 remains in place. At the moment, there is not a "trend of VIX" signal working, although one may be forthcoming soon. If both VIX and its 20-day moving average are below the 200-day moving average, this would signal the beginning of a new "trend of VIX" buy signal. The lower right-hand area of the accompanying VIX chart shows these two moving averages at basically identical values, while VIX is below the 200-day.
The construct of volatility derivatives has returned to a bullish outlook for stocks, after a brief scare during the week ending Nov. 21, when it appeared that the term structures might be inverting. Currently, both term structures are sloping upwards, and the VIX futures are trading with a strong premium to VIX, and all is well on the bullish front.
Moreover, the post-Thanksgiving seasonal period is in place. There are various positive seasonal indicators from now through the end of January. So far, this hasn't had much effect, but there is still time for it to work. The Russell 2000 Index RUT continues to be slightly stronger than SPX, which is in line with the positive seasonals.
In summary, SPX remains in its trading range, but new buy signals have arisen in a few areas, and there are no new sell signals. If the positive seasonality kicks in, we may see all-time highs before year end. In any case, we will take positions in line with new signals as they occur, and we will continue to roll deeply in-the-money positions.
New Recommendation: Potential breakout
If SPX breaks out to new all-time highs, we want to add to our bullish positions:
If SPX closes above 6,900 for two consecutive days, then buy 1 SPY (Jan. 16) at-the-money call and sell 1 SPY (Jan. 16) call with a striking price 20 points higher.
If this recommendation is established, we will set a stop for the position.
New recommendation: SPDR Gold Shares ETF $(GLD)$
A new weighted put-call ratio has been issued for SPDR Gold Shares ETF GLD. We were invested in this recently and made a decent profit. GLD really didn't pull back all that much during its October-November correction, but put-buying exploded. It seems that the crowd couldn't wait to get bearish on gold. Now gold is rallying again and a new buy signal is in place.
Buy 1 GLD (Jan. 16) 390 call and sell 1 GOLD (Jan. 16) 415 call
We will continue to hold as long as the put-call ratio remains on a buy signal.
Follow-up actions:
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.
Also, for outright long options, roll if they become 8 points in-the-money.
Long 1 TSEM (Dec. 19) 115 call and short 1 TSEM (Dec. 19) 130 call: Since TSEM $(TSEM)$ traded at 115 on Dec. 2, the entire spread should have been rolled up to the 115-130 call spread. Continue to hold without a stop for now.
Long 2 BXP (Jan. 16) 72.5 puts: Sell these BXP $(BXP)$ puts as the put-call ratio has rolled over to a buy signal.
Long 2 CME (Dec. 12) 285 calls: Continue to hold CME $(CME)$ as long as the put-call ratio remains on a buy signal.
Long 1 SPY (Dec. 26) 679 call and short 1 SPY (Dec. 26) 699 call: This is the "spike peak" buy signal position. The original spread was rolled up when SPY SPY traded at 679. It will be held for 22 trading days. It would be stopped out if VIX were to close above 28.27, the most recent VIX spike peak.
Long 2 PLD (Dec. 19) 125 puts: We will hold as long as the put-call ratio for PLD $(PLD)$ is on a sell signal.
Long 2 SPY (Dec. 12) 682 calls and short 2 SPY (Dec. 12) 697 calls: This is our post-Thanksgiving seasonal trade. Roll up if the long call becomes 10 points in-the-money. Otherwise, the entire debit is at risk initially.
Long 3 SLV (Jan. 16) 48 calls: We will hold these calls as long as the weighted put-call ratio buy signal for SLV SLV remains intact.
All stops are mental closing stops unless otherwise noted.
