MW Stock investors are leaping before they look as market uncertainty takes a toll

By Lawrence G. McMillan

S&P 500 is in correction territory, and buyers are scarce

The S&P 500 Index SPX continues to fall and has broken through all of the support levels that were in place. Most important, it has broken below the trading range that had been in place since last November. There is tentative support at this week's lows, near 5,525. There also may be support at last September's lows, at 5,400.

The U.S. market currently is quite oversold, but oversold does not mean "buy." Rather, we are still waiting on confirmed buy signals, which for the most part have been evasive. Oversold rallies can be strong initially but generally fade out when they reach the declining 20-day moving average, which is currently at 5,900 and falling quickly. Still, that would suggest a 300-point rally once it gets underway.

One evidence of an oversold condition is the fact that SPX is trading well below the -4<SIGMA> modified Bollinger band (mBB). This may eventually lead to a McMillan Volatility Band $(MVB.AU)$ buy signal, but there is no certainty of that. First, SPX must close above its -3<SIGMA> band, which would generate what we call a classic buy signal. We don't trade those. Rather, we need further price confirmation beyond that in order to generate the MVB buy signal. This process may take some time, so there is nothing to do at the moment except observe.

Equity-only put-call ratios remain firmly on sell signals for stocks. That is, the ratios are continuing to rise at a steady pace. They won't generate buy signals until they roll over and begin to trend lower.

Market breadth is getting hammered - especially "stocks only" breadth, which is trailing behind New York Stock Exchange breadth by a large amount. Both breadth oscillators remain on sell signals and are in deeply oversold territory. It would take at least two or three days of positive breadth before these oscillators could roll over to buy signals. Moreover, another sign of an extremely oversold market is the fact that the two oscillators have spread quite far apart. When they converge, that is a short-term (one-week) buy signal for stocks.

New lows on the NYSE have increased and continue to dominate new highs. Thus, this indicator remains on a sell signal. The number of new highs was only 11 on Wednesday. The last time the NYSE saw so few new highs was in April 2024, near the bottom of a market correction. New highs would have to outnumber new lows for two consecutive days in order to terminate this sell signal.

The Cboe Volatility Index VIX continues to trend higher, and thus the trend of VIX sell signal remains in place. Its inception is marked with a circle on the accompanying VIX chart on the lower right. Contrasting that to a certain extent is the fact that yet another VIX "spike-peak" buy signal has taken place, as of the close of trading on March 12. VIX reached a high of 29.57 on March 11 and then closed more than 3.0 points below there on March 12. There have been repeated attempts at a VIX spike-peak buy signal recently, but the others have been stopped out when VIX subsequently closed above that previous peak.

The construct of volatility derivatives has been more bearish in the last couple of weeks than we've seen since the pandemic market of March 2020. The term structure of the VIX futures slopes downward. So does that of the Cboe volatility indices. That is a bearish sign for stocks, especially the inversion in the two front-month VIX futures, where March is trading above 1.30 above April (and reached almost 3.0 points above earlier this week). There is yet another oversold condition, in that VIX is trading well above the 3-month VIX (VIX3M). When VIX returns to its "normal" place below VIX3M, that is a short-term (one-week) buy signal for stocks.

In summary, we have only one buy signal in place - the VIX spike peak - and it has had trouble gaining traction of late. The large number of oversold conditions will eventually spur a sharp, but potentially short-lived, rally back to the declining 20-day moving average (which is about 300 points above current levels).

This is likely a bear market now, and volatility will remain high but probably won't spike up like it would in a crash. We will trade confirmed signals when they occur. Meanwhile, roll deeply in-the-money puts down to lower strikes.

New VIX spike-peak buy signal

The previous spike-peak buy signal of March 5 was quickly stopped out on March 10, when VIX closed at a higher high than the previous peak. VIX immediately went into "spiking mode" again and generated another spike-peak buy signal at the close of trading on March 12.

Buy 1 SPY SPY (April 17) at-the-money call and Sell 1 SPY (April 17) call with a striking price 20 points higher.

This position would be stopped out if VIX were to close above that most recent peak of 29.57. Otherwise, by the rules of the trading system that we have built around these spike peaks, we will hold for 22 trading days.

Potential oversold buy signal

As noted in the market commentary above, a short-term buy signal will occur when VIX closes back below the 3-month VIX (VIX3M). When that happens, it triggers a one-week buy signal for the broad stock market.

If VIX closes below VIX3M (3-month VIX), then buy 1 SPY (March 28) at-the-money call and sell 1 SPY (March 28) call with a striking price 15 points higher.

Exit the trade one week later. Roll both calls up if the lower call becomes 8 points in-the-money or more.

New recommendation: Amphenol

There is a new put-call ratio buy signal in Amphenol Corp. $(APH)$. The stock is in a downtrend, though, so we want to see it break that downtrend before acting on the buy signal.

If APH closes above $65, then Buy 2 APH (April 17) 65 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 SPDR S&P 500 ETF Trust 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 bull-call 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 4 expiring WBA (March 14) 11 calls: This is the "alternative" Dogs of the Dow position. Walgreens Boots Alliance Inc. accepted the takeover bid from Sycamore Partners of $11.45 per share, plus a $3 contingent value right $(CVR)$, which could take some time to collect, as it depends on the sale of the VillageMD portion of WBA $(WBA)$. Sell these calls now and do not replace them.

Long 1 SPY (March 21) 607 call and Long 1 SPY (March 21) 555 put: We originally bought a SPY straddle, and then later rolled the put down. In line with instructions to continue to roll any option that becomes at least 8 points in the money, the 595 put was rolled to the 587 strike, and then later to the 579 strike, then 571, then 563 and currently 555 - all in the March 21 expiration, as SPY has continued to decline sharply. Now, roll that SPY (March 21) 555 put out to the SPY (April 4) 555 put.

Long 2 Allstate Corp. $(ALL)$ (March 21) 200 calls: Hold these calls as long as the put-call ratio buy signal is in place.

Long 10 Teucrium Wheat Fund WEAT (March 21) 5 calls: We will hold these calls as long as the put-call ratio buy signal is in place.

Long 6 expiring VIX (March18) 24 calls: We haven't really had a volatility explosion, but VIX has risen far enough to make these profitable. The last trading day for these calls is Monday. Roll to the VIXW (April 2) 29 calls. Stop out if VIX closes below its 200-day moving average for two consecutive days.

The VIX spike-peak buy signal: The SPY (April 17) 578-598 call bull spread was purchased on March 6, and it was stopped out at the close of March 10 when VIX closed above 26.35. A new spike-peak buy signal has since occurred (see market comment above).

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 the book, Options As A Strategic Investment. www.optionstrategist.com

Disclaimer:

(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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March 13, 2025 15:16 ET (19:16 GMT)

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