Market volatility, or the lack of it, has been sending a buy signal for the overall stock market

New recommendations include making an options bet that the stocks of GE HealthCare and Medtronic will fall, because there were too many bets already made that the stock would rise.

There's a saying on Wall Street that the time to be fearful is when others are greedy. And based on that contrarian strategy, the options market has helped identify two new ways investors may profit from going against the crowd.

There is a new sell signal in GE HealthCare Technologies' stock $(GEHC)$ from the "put-call ratio." That ratio compares activity in put options, which provide the right to sell at a predetermined price, to that in call options, which provide the right to buy.

The latest rally in the stock - it has climbed more than 12% over the past three months - has caused heavy call buying. Too much, in fact. Thus, by this contrarian system, a peak in call buying is a sell signal for the stock.

There was a similar signal in January that worked out well.

Buy 2 GEHC (Oct. 16) $70 puts, in line with the market.

We will hold these puts as long as the weighted put-call ratio for GE HealthCare's stock remains on a sell signal.

Likewise, there is also a new put-call ratio sell signal in Medtronic's stock (MDT). Since the end of May, the stock has soared 26% through Thursday, and that has eventually led to an overly optimistic outlook by call buyers.

But now call buying has peaked (that is, the put-call ratio has made a new low on its chart recently) and that is a sell signal for the stock. There were sell signals from similar levels last November and January, and only the second one gained traction, but the stock eventually fell for a few months.

Buy 1 MDT (Oct. 16) $92.5 put, in line with the market. Again, we'll hold these puts as long as the weighted put-call ratio for the stock remains a sell.

The contrarian calls in these stocks come as the healthcare sector has been on a roll. The State Street Health Care Select Sector SPDR ETF XLV has advanced 17.4% over the past three months, to make it the best-performing of the SPDR ETFs tracking the S&P 500's SPX 11 key sectors.

Everyone wants to own the VIX, and that's bullish

Staying on the contrarian theme, expectations that volatility will have to eventually start rising again is a positive signal for the stock market.

The CBOE Volatility Index VIX has been largely unimpressed by any bearish moves, and that continues to be the case.

The market tends to fall faster than it rises, so volatility readings, like the VIX, will usually decline when the market is rising, and fall when the market is declining.

With the S&P 500 surging more than 1% on Thursday, the VIX dropped 6.1% to 14.28, well below the historical average range.

I am seeing a number of articles about the VIX, often written by people who are looking to "get long," or buy, the VIX in advance of an expected explosion in volatility.

The bottom line is that everyone seems to want to own VIX, as they expect a market downturn and a spurt in volatility. We are not going to participate in that speculation.

So as long as the VIX is down at current levels near 15, the trend of the VIX buy signal for the stock market remains in place.

Besides of the price of the VIX, the construct of volatility derivatives remains bullish for stocks. One need look no further than the comparison of September VIX futures (VXU26) (the front month) and October VIX futures (VXV26).

The October contract was nearly 3 points over the September contract, according to FactSet data. As long as that differential is positive, it is a bullish sign for the stock market.

Follow-up actions

Long 1 JKHY (Sept. 18) $165 call: As usual, we will hold this call as long as the weighted put-call ratio for Jack Henry & Associates' stock $(JKHY)$ remains on a buy signal.

Long 6 KEY (Sep. 18) $23 puts: We will hold these as long as the weighted put-call ratio for KeyCorp shares remains on a sell signal.

Long 5 VIX (Sept. 16) 24 calls: We are going to retain a small position in "long volatility," just because of the seasonal trade here. We will add to this position if VIX closes above its 200-day moving average for two consecutive days. The 200-DMA ended Thursday at 18.32, according to FactSet.

Long 2 ESS (Sept. 18) $280 puts: As usual, we will hold these puts as long as the weighted put-call ratio for Essex Property Trust shares (ESS) remains on a sell signal.

Long 2 CVS (Sept. 18) $97.5 puts: We will hold as long as the weighted put-call ratio for CVS Health's stock (CVS) remains on a sell signal.

Long 3 SLV (Sep. 18) 59 calls: The trailing closing stop remains at $58 for these calls.

Long 1 TSLA (Sep. 18) $335 call and short 1 TSLA (Sep. 18) $385 call: As usual, we will hold as long as the weighted put-call ratio Tesla's stock (TSLA) remains on its original buy signal.

Long 4 EEM (Sept. 18) $66.5 calls: We will hold this position as long as the put-call ratio for the iShares MSCI Emerging Markets ETF EEM remains on a buy signal.

Long 1 ALLE (Oct. 16) $160 put: We will hold this put as long as the weighted put-call ratio for Allegion's stock $(ALLE)$ is on a sell signal.

Long 2 CMP (Dec. 18) $25 calls and puts (i.e., long 2 straddles): If Compass Minerals International's stock $(CMP)$ trades at $32.5 or higher, roll the calls up to the $32.5 strike. Conversely, if it trades down to $17.5, roll the puts down to the $17.5 strike. Otherwise, we are holding without a stop for now.

Send questions to lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading adviser. 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 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 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