MW These 2 seasonal stock-market patterns could give your portfolio a boost

By Lawrence G. McMillan

Investors take notice of the presidential cycle and years ending in '5'

Stock traders and investors often look for seasonal, historical stock-market patterns to guide investment decisions. One pattern is that years ending in "5" have generally been quite bullish. In fact, these years were wildly bullish until 2005, when SPX registered only a small gain (and the Dow Jones Industrial Average DJIA registered a small loss). In 2015, both of these U.S. market benchmarks registered small losses.

Another seasonal trend is the four-year U.S. presidential cycle. In general, the market rises modestly in the first year after a presidential election, followed by trouble in the second year. In years three and four, the market rallies as the administration in power attempts to boost the economy to get re-elected.

So, this year is a "double bonus" of sorts, in that it is a year ending in '5' and it is the first year of the presidential cycle.

S&P 500 in a trading range

The S&P 500 Index SPX is now in its trading range. Action is volatile, so being in the trading range by no means indicates that the market is dull.

This range has support between 5,770 and 5,860, and resistance near 6,100. There is one gap left on the SPX chart (circled on the accompanying chart), and that would be filled if SPX were to trade down to 5,870.

The fact that action has been volatile within the range has kept realized volatility relatively high. As a result, the "modified Bollinger Bands" on the SPX chart are still rather far apart. Realized volatility, as measured by the 20-day historical volatility of SPX (HV20) remains in an uptrend - but just barely. If it falls to 13% or lower, that would be bullish sign for stocks.

The rather sharp declines early in the week brought many indicators to the brink of sell signals, but few have actually been confirmed. Equity-only put-call ratios are a good example. Both ratios are below their recent highs, so technically that puts them on buy signals. The weighted ratio is clearly declining, so no problem there. However, the standard ratio has begun to move sideways (parallel green lines on its chart) and is now in a mild trading range of its own. This ratio won't give a clear signal until it moves out of that range.

Market breadth has been trying to stay positive. The breadth oscillators dipped far enough to generate sell signals during the week, but they have already pulled back out of that, so they are on tentative buy signals again at this time. This is our shortest-term indicator and can be subject to whipsaws.

New highs on the NYSE have outnumbered new lows, for the most part. That keeps this indicator on a buy signal.

VIX VIX did not rise all that much during the heavy tariff-related market selling. This seems significant, because the last two times that the market took a sharp nosedive, VIX responded with a sharp rise. This time, VIX briefly rose above 20 for a few minutes on Monday, and that was about it. As a result, the most recent "spike peak" buy signal of Jan. 27 remains in place. That particular buy signal will last for 22 trading days, unless it is stopped out by VIX closing above the peak that generated the signal - 22.51. Meanwhile, there is no trend of VIX signal at this time, since VIX is below its 200-day moving average $(MA)$, but the 20-day MA is above the 200-day.

The construct of volatility derivatives also remained bullish during the selling earlier in the week. It currently holds a bullish outlook for stocks, since the term structures slope upward, and the VIX futures are trading at a premium to VIX.

In summary, we are trading individual signals as they occur, but we do not have a "core" position right now that SPX is in a trading range. The weight of the evidence of the indicators is bullish, but unless SPX can break out convincingly over 6,100, that won't matter much. Continue to roll options that become deeply in-the-money.

New recommendation: Allstate $(ALL)$

A new put-call ratio buy signal has been generated for ALL. In addition, it just reported positive earnings and jumped higher, blasting through resistance in doing so. I'm not at all a fan of "chasing earnings," but in this case, the impetus is the put-call ratio buy signal, and not the earnings.

Buy 2 ALL (Mar. 21) 200 calls in line with the market.

We will hold these calls as long as the put-call ratio buy signal is in place.

New recommendation: Wheat $(WEAT.UK)$

There is a new buy signal in wheat futures, based on the put-call ratio using the wheat options that trade on the CBOT. The underlying futures appear to have broken out to the upside as well. There is an ETF that simulates the price of wheat, so one does not have to have a futures account in order to trade this recommendation. Use the options on the Wheat ETF $(WEAT)$.

Buy 10 WEAT (Mar. 21) 5 calls in line with the market.

We will hold these calls as long as the put-call ratio buy signal is in place.

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.

For outright long options, roll if they become 8 points in-the-money.

Long 4 WBA $(WBA)$ (Feb. 21) 12.5 calls: This is the "alternative" Dogs of the Dow position. Hold without a stop at this time.

Long 1 SPY SPY (March 7) 603 call and short 1 SPY (March 7) 623 call: This position was originally based on the latest "spike peak" buy signal of Dec. 19. It was subsequently rolled to this spread when the most recent "spike peak" buy signal occurred.

Long 1 SPY (Feb. 21) 580 put and short 1 SPY (Feb. 21) 550 put: This spread is to be held as long as at least two of these three indicators remain on sell signals: HV20, trend of VIX, and equity-only put-call ratios. The trend of VIX sell signal has been stopped out, but the other two are tentatively in place for now.

Long 1 expiring SPY (Feb. 7) 605 call and Short 1 SPY (Feb. 7) 618 call: This position was bought because of the breadth oscillator buy signals. The breadth oscillators nearly rolled over to sell signals, but yesterday's strong breadth avoided that. So, roll: Buy 1 SPY (March 7) 606 call and sell 1 SPY (March 7) 621 call.

Long 1 SPY (March 7) 607 call and short 1 SPY (March 7) 622 call: This position is based the "new highs vs. new lows" buy signal. This trade would be stopped out if, on the NYSE, new lows were to outnumber new highs for two consecutive days.

Long 1 SPY (March 21) 607 call and Long 1 SPY (March 21) 595 put: We originally bought a straddle, and then later rolled the put down. Continue to roll any option that becomes at least 8 points in the money.

Long 2 FIS (April 17) 80 calls: We will continue to hold these calls until the weighted put-call ratio of FIS $(FIS)$ rolls over to a sell signal.

January season trade: We entered and exited this trade (using the SPY (Feb. 14) 602 calls) for a small loss.

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

(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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February 08, 2025 16:28 ET (21:28 GMT)

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