The S&P 500 index stretched its oversold rally as far as it could. The question remains whether it is just an oversold rally or the start of a new bull market phase.
As we have said many times, oversold rallies usually die just above the 20 day declining moving average. This has slightly broken its 20-day moving average and bumped into its 200-day moving average. In doing so, he broke out of the downtrend line that had been in place.
In my opinion, however, that is not significant. What would be significant would be a close above 4600. Without that, the S&P SPX,
the chart is still bearish and that still warrants holding a “core” bearish position.
Equity-only put-call indices are both in buy signals now, having rallied to extreme heights, ie they were heavily oversold. Usually the buy signal from these heights is one of the best. These indices are declining indices and as such are bullish for stocks.
I would prefer to see both break below their February lows to give more confirmation to the relatively fresh signals, as twice before they looked like they had topped out, only to see them pull back up again strongly.
The amplitude had improved during the rally but now appears to be failing again. Both amplitude oscillators were on buy signals until Wednesday, when a severely negative day in the market, and amplitude, pushed the oscillators back to sell signals. These oscillators have been going back and forth between buy signals and sell signals lately, without much sustainability. This latest buy signal lasted for five trading days, which is the longest this year.
If the amplitude turns negative again today, this most recent sell signal might be worth acting on; otherwise it is not.
The new 52-week highs have improved relative to the new 52-week lows, especially in terms of NYSE and “stocks only” data. This has been mainly due to the fact that the new lows have fallen to very low numbers.
What we need to see, for this indicator to generate a new signal, is that the new highs outnumber the new lows. and for the new highs to be large enough (for example, over 100) for two consecutive days. That has not happened so far, so this indicator is not yet in a buy signal.
has declined during the stock market rally, and that has made it a strong winner from the VIX “peak peak” buy signals (i.e. buy signals for the stock market) that were generated on the 24 February and again on March 9. exit this “peak peak” signal if the VIX were to return to “peak mode”, i.e. rise at least 3.00 points over any one, two or three day period, using closing prices.
Despite the recent drop in the VIX, it is not an entirely bullish sign for stocks. VIX remains above its 200-day moving average. It would have to close slightly below 21 to close below 200 days. As long as the VIX is above 200 days, the general trend of the VIX will continue to be higher and that can be a problem for stocks.
Volatility derivatives construction has improved a bit and is moderately positive for equities. The VIX futures term structure is upward sloping for the first four months (prior month is now the April VIX future). Additionally, VIX futures are trading at a premium to the VIX once again. Finally, the term structure of the CBOE volatility index is also upward sloping.
In short, we hold the “core” bearish position as long as SPX continues to trade below 4600. Around that bearish position, we have traded several oversold buy signals from certain individual indicators. We will continue with that approach, while launching options to lock in profits and adhering to the stops required by the various systems.
New Recommendation: Nielson Holdings
Option volume in Nielson Holdings NLSN,
has remained high. This is in response to the news that Nielson he had turned down an all-cash offer of $25.40 per share from a group of private equity firms as this “significantly undervalued” the company.
Buy 3 May NLSN (20the) 22 calls
At a price of 2.50 or less.
NLSN: May 23,23 (20the) 22 call: offer 2.20, offered at 2.55
New recommendation: Pearson PLC
Option volume at Pearson PSO,
it has been strong for four of the last five days. The company had turned down an all-cash offer of just over $11 from Apollo Global Management and its subsidiaries. Now there are rumors that Apollo is going to raise the price. Stock volume patterns are positive and improving.
Buy 5 PSO Apr (14the) 10 calls
At a price of 0.90 or less.
PS: 10.31 Apr (14the) call: offer 0.70, offered at 0.95
We will hold without stopping initially.
follow up action
All stops are mental shutdown stops unless otherwise noted.
We are going to implement a “standard” rolling procedure for our SPY spreads: in any vertical up or down spread, if the underlying hits the short strike price, then roll the entire spread. that would be roll above in the case of a bull spread call, or roll down in the case of a bear put spread. Stay on the same expiration and keep the same distance between hits unless otherwise noted. Since the short strike on several of our bullish spreads is not that far away (with 452 being the closest), these rolls could come soon.
Long 700 FTK: Flotek Industries FTK,
still strong. We previously made a partial profit on 300 shares. The closing stop remains at 1.40.
Length 1 SPY Apr (14the) 448 call and short 1 SPY Apr (14the) 460 call: This position was taken in line with the MVB buy signal. This signal will remain in place unless SPX closes below its -4σ “Modified Bollinger Band” (mBB) or trades above the +4σ Band. None activated last week.
Long FUN Apr (14the) 60 calls: We will wait and see while these acquisition rumors unfold.
Long 1 SPY April (14the) 420 put and short 1 SPY April (14the) 390 put, plus also long 1 SPY Apr (14the) 440 put and short 1 SPY April (14the) 410 put: This is our “core” bearish position. Stop if SPX closes above 4600.
Length 1 SPY Apr (14the) 437 call and short 1 SPY Apr (14the) 452 call: A bull call spread was bought on Feb 24 in line with the VIX “peak peak” buy signal that occurred on that day, and has since built up. Stop if VIX goes back into “rise mode”, that is, if VIX closes at least 3.00 points during any one, two or three day period.
Long 2 ZEN April (14the) 125 calls and Short April 2 (14the) 140 calls: Hold on nonstop while activist activity is in progress.
Long 2 BBBY April (8the) 21 calls: Stop on a close below 18.
Long 2 ORCL May (20the) 77.5 calls: We bought them near the close of business on March 15, when Oracle ORCL,
closed above 78. We will hold as long as the put-call buy signal is in effect, and it still is.
Send your questions to: email@example.com.
Lawrence G. McMillan is president of McMillan Analysis, a registered commodity trading and investment 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 best selling book “Options as a strategic investment“.
Disclaimer: ©McMillan Analysis Corp. is registered with the SEC as an investment adviser and with the CFTC as a commodity trading adviser. The information in this newsletter has been carefully compiled from sources believed to be reliable, but its accuracy or completeness is not guaranteed. Officers or directors of McMillan Analysis Corp., or accounts managed by such persons, may hold positions in the securities recommended in the notice.