MW The stock market has one more chance to fight off the bears

By Lawrence G. McMillan

Another S&P 500 close below 5,870 would signal more downside for the index. Plus, Amazon looks weak.

The S&P 500 index SPX had been locked into a trading range between 5,870 and 6,100. A close below 5,870 over two consecutive trading days would usher in a period of bearishness. That leaves one trading day for the S&P 500 to keep the bears in hibernation, after closing at 5,827 on Jan. 10.

There is support below 5,870 - at 5,670 and 5,780 - but the chart would no longer be bullish if the index fell that far.

Equity-only put-call ratios continue to rise, with the weighted advancing more swiftly than the standard. As long as these ratios are rising, it is bearish for stocks. The weighted ratio is now above all of the "clutter" that occurred in a generally sideways movement last October and November. The standard ratio has not risen far enough yet to clear the similar hurdle on its chart.

Market breadth has generally been poor since early November. It made an attempt to improve about a week ago, and in fact, the breadth oscillators rolled over to buy signals. But this is our shortest-term indicator and thus the most subject to whipsaws. In the last two days breadth has been poor again, and those new buy signals are in jeopardy. On a more positive note, when SPX had a strong up day on Jan. 6, cumulative volume breadth $(CVB.AU)$ set an all-time high. That is normally a sign that SPX will follow along and do the same in a fairly short time.

New lows on the NYSE have continue to outnumber new highs, except for one day. So this indicator is in bearish territory and on a sell signal. That sell signal would be stopped out if new highs were to outnumber new lows for two consecutive days on the NYSE.

The realized volatility sell signal is still in place as well. That is, the 20-day historical volatility of SPX (HV20) remains elevated at 16%, and that is bearish for stocks as long as it continues to rise.

There was a recent attempt to generate a trend of VIX VIX buy signal. That occurred when VIX fell back below its 200-day moving average $(MA)$. However, it was stopped out as VIX rose back up again. This is shown in the box on the lower right of the VIX chart. Now the 20-day MA of VIX is back above the 200-day, so technically this is a trend of VIX sell signal. That is, when both VIX and its 20-day moving average are above the 200-day moving average of VIX, then VIX is trending higher, and that is negative for stocks.

The construct of volatility derivatives has remained bullish throughout, as the term structures of VIX futures have continued to slope upwards. The first sign of concern would be if the front-month January VIX futures began to trade at a higher price than the February VIX futures contract.

We had been maintaining a core bullish (out-of-the-money) position as long as SPX closed above 5,870. We will trade other confirmed signals around that, and we urge the taking of partial profits by rolling deeply in-the-money options.

New recommendation: SPY conditional sell signal

There is a new trend of VIX sell signal. In addition, other indicators have generated sell signals: HV20 and equity-only put-call ratios, to name two. We don't have a position that aligns with these various sell signals, but SPX has confirmed a breakdown by closing below 5,870, so we will add bearish positions:

With SPX closing below 5,860, buy 1 SPY SPY (Feb. 21) at-the-money put and sell 1 SPY (Feb. 21) put with a striking price 30 points lower.

Hold this position as long as the three indicators mentioned in the above paragraph remain on sell signals. If two of them roll back over to buy signals, we will exit this trade. The status will be updated weekly.

New recommendation: Amazon $(AMZN)$ puts

There is a new put-call-ratio sell signal in AMZN $(AMZN.UK)$. If the stock breaks down through support at $218, we will act on this sell signal.

If AMZN closes below $218, then buy 1 AMZN (Feb. 21) 215 put in line with the market.

If this put is bought, we will hold as long as the put-call ratio for AMZN remains on a sell signal.

New recommendation: Deckers Outdoor $(DECK)$ puts

This conditional recommendation was made last week, but the condition has not yet been satisfied. It remains an open recommendation. A weighted put-call ratio sell signal has developed in DECK (DECK), and if the stock falls below support at 202, we want to act on it:

If DECK closes below 202, then buy 2 DECK (Jan. 17) 205.5 puts in line with the market.

If these puts are bought, we will hold the position as long as the weighted put-call ratio for DECK remains on a sell signal.

Market insight: January early-warning system

The first five trading days of the new year are often enough time to give one a sense of what is to come for the entire year. This is not to be confused with the January Barometer - a system that says "as goes January, so goes the whole year." Amazingly both have an accuracy record of more than 83%. That is, if they are up, there is better than an 83% chance that the stock market will be as well for the year. Of course, the market is usually up, so that may not be so amazing after all. The Dow Jones Industrial Average DJIA has been up in 55 of the past 75 years, a 73% accuracy rate.

SPX closed out 2024 at 5,881. In the first five trading days of 2025, the index posted a tiny gain of 0.6%. Even that was enough to give the bulls some hope. In the years since strategist Yale Hirsch began to keep these statistics in 1950, SPX has had a first-five-day gain of between 0.3% and 0.9% 12 times. The market has been up for the full year in 10 of those 12 years, with the two losses being a small one (-1.6%) in 1994 and a much more significant loss of 13% in 1966.

You may recall that the most recent "Santa Claus rally" seasonal time frame - covering the last five trading days of one year and the first two trading days of the next - delivered a small loss of -0.5%.

We don't normally make long-term forecasts covering an entire year, and certainly our recommendations are of a shorter time frame than that. But January's "early warning system" of the year ahead could be a small feather in the bulls' cap. We'd rather rely on our more trustworthy short-term indicators and trade the moves as they occur throughout the year.

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.

Also, for outright long options, roll up if they become 8 points in-the-money.

Long 1 SPY (Jan. 24) 607 call: This is our "core" bullish position. Stop out of the position if SPX closes below 5,870 for two consecutive days.

Long 4 WBA (Jan. 17) 9 calls: This is the "alternative" Dogs of the Dow position. Hold without a stop at this time. A takeover rumor is in effect, following a Wall Street Journal report that WBA $(WBA)$ is in talks to sell itself to private equity firm Sycamore Partners.

Long 10 POET (Jan. 17) 5 calls: Raise the stop: sell the calls if POET $(POET)$ closes below $5.20.

Long 1 SPY (Jan. 24) 589 put: We will hold this put as long as the breadth oscillator sell signal is in effect, which is still the case currently. Breadth had shown some improvement a week ago, but has faded in the past two days.

Long 4 DKNG (Jan. 17) 42 puts: Sell these puts now, since the weighted put-call ratio for DKNG $(DKNG)$ has rolled over to a buy signal.

Long 1 SPY (Jan. 17) 590 put and short 1 SPY (Jan. 17) 550 put: This position is based on the "new highs vs. new lows" sell signal. This position will be held until new highs exceed new lows on the NYSE for two consecutive days.

Long 1 SPY (Jan. 24) 586 call and short 1 SPY (Jan. 24) 606 call: This position is based on the latest "spike peak" buy signal of December 19. This trade would be stopped out if VIX were to close at a higher price than the previous peak (28.32). Otherwise, the position will be held for 22 trading days.

Long 3 VRAR (Jan. 17) 4 calls: VRAR $(VRAR)$ closed below our stop of$ 2.40 on Jan. 8, but there is no bid for the calls. Sell them if and when you can.

Long 6 ABAT (Jan. 17) 2.5 calls: Stop out if ABAT $(ABAT)$ closes below $1.95 on any day.

The conditional recommendation that was made regarding the "Santa Claus rally" failure did not meet the condition. That is, SPX did not close below 5,920 on Jan. 3, so that recommendation is canceled.

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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January 10, 2025 17:13 ET (22:13 GMT)

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