MW The stock market is giving investors a sign - and it's bearish

By Lawrence G. McMillan

The S&P 500 closing below 5,500 could trigger more selling and lead to a bear market

The S&P 500 index SPX is falling hard on the first trading day after the Trump administration announced new and tough tariffs on imports to the U.S.

S&P 500 technical indicators currently show overhead resistance near 5,800. Conversely, there have been multiple successful tests of support at the 5,500 level. I wouldn't exactly say that 5,500-5,800 area is a trading range, but any clear breakout would see further movement in the direction of that breakout.

A clear breakout would be, at a minimum, a close outside of that range. Two trading days would add more credence, although false breakouts have been a hallmark of this market for several months now.

Investors experienced false upside breakouts to new highs (even two-day breakouts), and a false downside breakout in January. Just this past week, SPX traded below 5,500 but then quickly rallied back above it - another false move of sorts. In any case, a close below 5,500 would establish a pattern of lower highs and lower lows on the SPX chart. That defines a bearish trend at least and probably defines a bear market.

What makes the current situation a bit unusual is that the market had rallied more than 100 points off its lows during the last half of the day on April 2. The heavy selling came after the close. So, the technical indicators, such as put-call ratios and market breadth, finished the day on a bullish note.

Equity-only put-call ratios are split in their outlooks. The standard ratio remains on a sell signal. This ratio remains on a bearish outlook for stocks. However, the weighted ratio has been declining, and thus it is on a buy signal. Today's trading will impact this, but in any event we want to see these two in agreement before we act on a signal from this indicator. This is one of the indicators that looked better on the close of April 2, but today's heavy selling may change the outlook.

Market breadth had been improving, and by the close of April 2, buy signals seemed ready to emerge. However, with what is likely to be a very negative breadth day on April 3 (certainly at the beginning, at least), we want to see how things look a day later before taking any action based on this short-term indicator.

New lows had outnumbered new highs on the NYSE, and those new lows numbered more than 100 for two consecutive days. So, this indicator generated a sell signal on March 31. That will remain in effect until new highs outnumber new lows for two consecutive days on the NYSE.

VIX VIX had been rather subdued during the decline from SPX all-time highs in mid-February. Today VIX is spiking higher, but eventually it will retreat and generate a new "spike peak" buy signal. The last such signal was modestly profitable, after declining from a peak just above 29.

Meanwhile, the trend of VIX sell signal remains in place. It would be stopped out by a VIX close for two consecutive days below its 200-day moving average. Now that VIX is racing higher, the chances of this signal being stopped out are miniscule.

On a much more bearish note, the construct of volatility derivatives had begun to roll over to a negative slant on the market over the past week (even since the oversold rally failed near the 5,800 level on SPX), and now it is getting worse. The term structure of the VIX futures has begun to slope downward. Even worse is that the front-month April VIX futures are now 1.30 higher than the May VIX futures. That steep of an inversion in the front end of the curve is definitely bearish for stocks.

The VIX term structure had begun to slope downward on April 2, in anticipation of the tariff announcements to come after the close. So, the near-term nine-day VIX (VIX9D) was trading at a higher price than the other four longer-term volatility indexes. This index is also reflecting worries about what the unemployment report might look like on April 4. VIX will likely climb back above the three-month VIX (VIX3M), which is an oversold condition that eventually sets up a short-term buy signal, although it may take several days for that to happen.

In summary, the stock market has taken a volatile turn for the worse, and we will need to see how these indicators shake out in the aftermath of the trading on April 3. We will trade confirmed indicators as they occur. Continue to roll options that are deeply in-the-money.

Waiting for the bear

A close for SPX below 5,500 on April 3 would firmly establish a pattern of lower highs and lower lows on the SPX chart. If so, we want to take a core bearish position.

If SPX closes below 5,480, then buy 1 SPY SPY (June 20) at-the-money put and sell 1 SPY (June 20) put with a striking price 50 points lower.

If this position is established, then it would be stopped out if SPX were to reverse and close above 5,700.

In addition, the "new highs vs. new lows" indicator generated a sell signal on March 31. The market has fallen since then, but this is an intermediate-term signal, so there is still time to participate.

Buy 1 SPY (May 2) at-the-money put and sell 1 SPY (May 2) put with a striking price 30 points lower.

Hold until new highs outnumber new lows on the NYSE for two consecutive days.

Waiting for the VIX 'spike peak'

VIX is back in "spiking mode," so a new "spike peak" buy signal will eventually occur.

If VIX closes at least 3.0 points below this highest price that it reaches on this move upward from April 3 going forward, then buy 1 VIX (May 16) at-the-money call and sell 1 VIX (May 16) call with a striking price 20 points higher.

If established, this position will be held for 22 trading days. However, it would be stopped out if VIX were to subsequently close above that most recent peak.

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 expiring SPY (April 4) 555 put: We originally bought a straddle, and then later rolled the put down several times, eventually winding up with this long put. SPY is indicated to open well below 555 today, so roll this put to the SPY (April 17) at-the-money put.

Long 2 ALL (April 17) 210 calls: The put-call ratio has rolled over to a sell signal, so sell these Allstate $(ALL)$ puts now. Overall, this position was a small profit.

Long 10 WEAT WEAT (April 17) 5 calls: We will hold these calls as long as the put-call ratio buy signal is in place.

Long 6 expired VIX (Apr. 2) 29 calls: VIX never really got much going on the upside after an initial surge, so these calls expired worthless. Do not replace them.

Long 1 SPY (April 17) 574 call and short 1 SPY (April 17) 594 call: This position was originally a 554-574 spread, bought in line with the most recent VIX "spike peak" buy signal. It was then rolled up 20 points on each side, when SPY traded at 574 on March 24. Since a new "spike peak" buy signal is settling up, sell this spread and buy the new one recommended in the newsletter above.

Long 2 APH (April 17) 65 calls: Were bought when APH $(APH)$ closed above 65 on March 19. We will hold as long as the weighted put-call ratio for APH remains on a buy signal.

Long 1 SPY (April 17) 571 call and short 1 SPY (April 17) 591 call: This is the position that was bought when the MVB buy signal occurred on March 24. The target for this trade is for SPX to trade at the +4<SIGMA> Band, which is currently just above 6,020. This position would be stopped out if SPX closed below the -4<SIGMA> Band, which is currently at 5,450 and declining.

Long 8 IEF IEF (May 16) 94 puts: We will hold this position as long as the weighted put-call ratio for Treasury notes remains on a sell signal.

BXP conditional buy signal: For the past couple of weeks, we had an open recommendation to buy BXP $(BXP)$ calls if the stock could close above $70 a share. While that is probably still a valid breakout point, we are canceling the recommendation since the stock is well below that now.

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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April 03, 2025 13:14 ET (17:14 GMT)

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