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S&P 500 is now giving a ‘buy’ signal and there’s strong support for a summer rally

In World
June 08, 2024
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– Getty Images/iStockphoto

The S&P 500 index SPX closed above 5,340 on June 6, confirming a new upward leg in this bull market. There should then be support in the area of the previous highs: 5,260 to 5,325, with various support areas below that.

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There is no formal resistance when the S&P 500 is at an all-time high, of course, but the +4σ “modified Bollinger Band” (mBB) can sometimes act as a temporary resistance level. That band is currently at 5,395 and rising. Meanwhile, a McMillan Volatility Band (MVB) sell signal occurred and was confirmed when the S&P 500 traded at 5,228 on May 30. That sell signal — the only one among our otherwise bullish indicators — would be stopped out if SPX were to close above the +4σ band.

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Equity-only put-call ratios continue to decline, which is bullish for stocks. They really didn’t waver when the S&P 500 sold off in late May, and now they are making new relative lows. They are quite low on their charts, in fact, meaning they are in overbought territory. But that is not a sell signal. Sell signals will not occur until these ratios roll over and begin to trend higher.

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Market breadth has been accurately swinging back and forth with the market. Currently, our breadth oscillators are on buy signals. Those buy signals were confirmed on May 31 after two consecutive days of positive breadth. On those two days, small caps outperformed large caps, and breadth was strong even though the S&P 500 was not. That has not continued to be the case, but it did affect the breadth indicators. We would like to see breadth continue to expand now that the S&P 500 has risen to all-time highs.

Cumulative volume breadth (CVB) has not confirmed the new high in the S&P 500 with one of its own, but CVB is not far from a new high, so we would expect to see that confirmation soon.

New highs on the NYSE have continued to dominate new lows. Thus, this indicator remains bullish for stocks. There was one day where new lows were greater (May 29), but it takes two consecutive days with new lows exceeding new highs in order to stop out this buy signal.

Market volatility VIX has remained quite subdued. Thus, the trend of VIX buy signal (circled on the accompanying VIX chart) remains in place. A low VIX is an overbought condition, but the market can rise a great deal while VIX is “overbought.” The only time that VIX gives a warning signal to the stock market is when VIX rises sharply. The first thing we would look for in terms of a warning sign would be if VIX were to close above its 200-day moving average (MA). That MA is at 14.65 and slowly declining.

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The construct of volatility derivatives remains a positive indicator for stocks, too. The term structures of the VIX futures and of the CBOE volatility indices continue to slope upwards.

In summary, the indicators are mostly bullish (except for the MVB sell signal) and the S&P 500 has confirmed this latest upside breakout. A “core” bullish position is now in order.

New recommendation: SPY buy signal

The S&P 500 closed above 5,340 on June 6, so buy 1 SPY SPY (June 21) at-the-money call.

This is a new “core” bullish position, which is taken when the S&P 500 chart is in a bullish state. Stop out of this trade if the index closes below 5,260.

Strategy change: CSX

We are cancelling the CSX CSX conditional call buy recommendation.

New recommendation: Walgreens Boots Alliance

There’s a longer-term potential buy signal from Walgreens Boots Alliance WBA. We are keeping this recommendation open but will not continue to reprint the reasoning behind the trade. A McMillan Volatility Band (MVB) buy signal will occur if WBA trades at $16.71 or higher (the MVB system can be used on any chart). We will take a small position if that happens and then move to a full position if WBA can continue to rally.

If WBA trades at $16.71 or higher, then buy 2 WBA (July 12)16.5 calls in line with the market. Later, if WBA closes above $19.50, then buy 2 WBA (July 12) 20 calls in line with the market.

As with any MVB recommendation, the purchase of these 16.5 calls would be stopped out if WBA were to close back below its -4σ Band.

The graph below shows that WBA previously had closed below the -4σ band but now has closed back above the -3σ band. The MVB buy signal won’t be in place until WBA confirms with a trade at $16.71 or higher.

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New recommendation: Core Scientific

Option volume in Core Scientific CORZ rose sharply on news that CoreWeave had offered to buy Core Scientific for $5.75 per share. Core Scientific has rejected this offer. The share price of Core Scientific closed well above the $5.75 price level and volume patterns are extremely strong. Given the heavy level of stock and option volume and the fact that Core Scientific shares are trading well above the rejected price, we are going to recommend a position.

Buy 5 CORZ (July 19) 7 calls in line with the market.

We will initially hold these calls without a stop, while the rumors play out.

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Follow-up actions: 

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.

Long 4 RSI RSI (June 21) 7.5 calls: The stop remains at 8.30.

Long 3 AEYE AEYE (June 21) 25 calls: Keep the stop at 20.50.

Long 3 USO USO We will hold these puts as long as the put-call ratio is on a sell signal.

Bought in line with the new highs vs. new lows buy signal. This trade would be stopped out if NYSE new lows exceed NYSE new highs for two consecutive days. We want to roll this spread up: Sell the spread you currently own and replace it with a simple long call — buy the SPY (June 21) 535 call.

Long 2 LW LW 82.5 calls: We will hold these calls as long as LW remains on a weighted put-call ratio buy signal.

Long 3 CTSH CTSH (July 19) 70 calls: Sell these calls now since the weighted put-call ratio is no longer on a buy signal.

Long 3 BL BLRoll down to the (June 21) 47.5 puts and lower the trailing stop to 52.

Long 1 SPY (July 19) 522 put and Short 1 SPY (July 19) 497 puts: This put bear spread was bought in line with the MVB sell signal, which occurred on May 30 when the S&P 500 traded at 5,228. It will be stopped out if the S&P 500 closes above the +4σ Band, which is currently at about 5,390 and rising. Its target is the -4σ Band, which is currently 5,160 and moving sideways.

Long 3 INSG INSG (June 21) 9 calls: Stop out of this position if INSG closes below $6.80.

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.”

©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.

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