Nearly every day, one hears a trader on TV telling you to “buy protection, because it’s cheap.” Is it, really? Yes, $VIX is low, so that means that overall implied volatility of $SPX options is low, and therefore by inference, one might think that $SPX puts are cheap.
It’s more complicated than that. It depends on two things that these commentators never mention – the skew of the $SPX puts, and the term structure of the $SPX puts (or the $VIX futures, if you prefer).
This has been a very strong week for the stock market. New highs have been registered by all the major indices. Not only have all of these major averages traded at new all-time highs, but these moves have been accompanied by strength from the technical indicators. The only problems that are cropping up are those from an overbought market, but as readers know "overbought does not mean sell."
There is support all through the 2170 to 2190 area. As one might expect, call buying has been heavy this week, dominating put volume. Hence the put-call ratios are dropping rapidly. That means that both of the equity-only put-call ratios are on buy signals.
The bulls finally took total control for a day as nearly every major average broke out to an all-time high (the one exception – the NASDAQ Composite – is within a mere 5 points of a an all-time closing high). $SPX advanced so swiftly that it is now above the +4σ “modified Bollinger Band.” As such, a sell signal will definitely occur in the near future, when $SPX closes back below the +3σ Band. Today, that would require $SPX to fall to 2227 – a drop of 14 points. The +3σ Band is moving higher daily, though, so that number will change as the days go by. An mBB sell signal will be a significant negative, but it is not necessarily an immediate sign of the top of the market. The last two mBB sell signals were in November 2014 and October 2015.
The recording of McMillan Analayis Corp. President, Lawrence G. McMillan's recent webinar with Investor Inpsiration is now available. In this webinar recordied on 11/216, McMillan touches on the following points:
$SPX has struggled this week, but it remains above the rising 20-day moving average, so the $SPX chart is still bullish. There is support at 2180, but the more important support is at 2170. As long as $SPX is above that level, the chart will be bullish.
The put-call ratios are generally bullish at this time. The weighted equity-only put-call ratio (Figure 3), gave a buy signal just about the time of the election, and it has remained on that buy signal ever since. The standard ratio (Figure 2), however, ran into some problems along the way, but it is now back on a buy signal as well.
All systems are in bullish modes at this time. $SPX has broken out to new all-time highs, finally catching up to The Dow, Th Russell 2000, the Value Line Composite, and the NASDAQ Composite, which had already done so. There is support in the 2180 area.
Equity-only put-call ratios are on buy signals, as is the Total put-call ratio. These are not strong buy signals, by historic measurements, but suffice for now.
Breadth has been very strong on this rally, and with today's action, cumulative "stocks only" breadth has made a new all-time high as well. This is important confirmation. Both breadth oscillators are on buy signals.
We have written about Peabody Coal (BTUUQ) a couple of times previously – amazed at the rapid advance and short squeeze that occurred there. That stock had a second surge, post-election, as did many other coal stocks. But the action there pales in comparison to what’s happened in the “Water Transportation” stocks this week. These include the big oil tanker companies and the general shipping of things on the ocean. The whole sector has been very strong, but the “king” is Dry Ships (DRYS). The stock was up 1500% in just a few days and would have been higher except for the fact that trading was halted on Wednesday. But yesterday it lost 85% of its value in one day!
Even though we are not planning a full newsletter next week because I’ll be on a ship (and I don’t know how good the internet connection will be, either), we do want to update our Thanksgiving-based trading systems.
For the sake of brevity, we won’t detail the “3 days before Thanksgiving” or the “day after Thanksgiving” trading systems – if you want to call them that. They are not profitable, no matter how hard you want to stand on your head to interpret the data.
Many of our subscribers are familiar with the breadth oscillator differential buy signals that occur in deeply oversold markets – when the “stocks only” breadth oscillator falls far faster than the NYSE-based one. But recently, in the wake of the market strength since the election, the “stocks only” breadth oscillator has risen far faster than the NYSE-based oscillator. This is unusual. What does it mean for the markets when this happens? First, let’s offer a quick review of what the breadth oscillators are, and how we calculate them.
The bulls had an enjoyable week, although it was not a spectacular one. The post-election rally has held together for the most part, except for a few sectors which are not benefitting from the anticipated "infrastructure boom."
$SPX edged to within 8 points of a new all-time yesterday, and the NASDAQ Composite was equally close. The Dow Jones 30 Industrials, the Russell 2000 Index, the Midcap 400 Index, and the Value Line Composite Index have already made new all-time highs.
Buy signals from both equity-only put-call ratios are officially confirmed. The standard ratio's buy signal occurred prior to the weighted, but both are in sync now.