MW The market's new big worry has nothing to do with stocks - and that's the problem

By Lawrence G. McMillan

Potential government shutdown is fueling volatility and sell signals - but this is one tough bull

Investors are concerned that a working government will come to a halt at the end of September.

The S&P 500 index SPX is pulling back as the stock market prepares for a potential U.S. government shutdown. So far, this hasn't caused much of a drop in prices, but coupled with overbought conditions, conditions might produce some new sell signals and become a problem.

The SPX chart remains positive, with various support levels intact: 6,550 (last week's lows), 6,500, 6,340-6,360 (August lows), and 6,200 (July lows). In reality, any decline below 6,500 is probably going to be viewed by the broad investing public as something to worry about, and that would generate selling. For now, though, the SPX chart remains in a strong uptrend.

SPX closed above the +4<SIGMA> "modified Bollinger band" (mBB) on Sept. 19, and that stopped out the previous McMillan volatility band (MVB) sell signal. Once that happens, there is the potential for a new MVB sell signal to take place when SPX eventually closes back below the +3<SIGMA> band. That has already occurred and is marked with a green "S" on the SPX chart. However, that is what we call a "classic" mBB sell signal, and we don't trade those. Rather we wait to see if there is further confirmation in the form of a further drop in SPX. That has occurred, and so there is a new MVB sell signal in place.

Equity-only put-call ratios have continued to decline into the lows of their charts, as the latest move by SPX to new all-time highs has been accompanied by fairly heavy call buying. That puts these ratios in overbought territory. However, as long as these ratios are declining, that is bullish for stocks. But when they roll over and begin to trend higher, sell signals will occur.

Market breadth has been a problem for some time, and now both breadth oscillators are back on sell signals. One would think that with SPX making a series of new all-time highs, the breath oscillators would have been rolling right along into overbought territory. But that has not been the case, as breadth has lagged, and now sell signals have occurred.

Cumulative volume breadth (CVB) - which measures the daily difference of volume on advancing issues minus volume on declining issues - has been much stronger than "normal" breadth. In other words, large institutions have been plowing into a smaller number of stocks, but their overall volume is so large that this measure keeps advancing.

New highs on the NYSE have continued to dominate new lows. Thus, this indicator remains on the buy signal that was first generated last June. This buy signal will remain intact unless new lows outnumber new highs on the NYSE for two consecutive days.

VIX VIX is moving higher but has remained subdued, so the trend of VIX buy signal (for stocks) remains in place. That would be stopped out if VIX were to close above its 200-day moving average $(MA)$ for two consecutive days. That MA is just above 19. As we've often stated, a low VIX is not a problem. It is merely an overbought condition. It's when VIX begins to rise that problems occur. So, one thing we watch is for VIX to enter "spiking" mode - an increase of at least 3.0 points over a three-day or shorter time frame, using closing prices. Today, VIX would have to close at or above 19.10 in order to enter "spiking" mode. It is barely at 17, though, so "spiking" mode is not imminent.

The construct of volatility derivatives remains bullish for stocks. The term structures of both the VIX futures and of the Cboe volatility indices continue to slope upward. Moreover, the futures are trading with a healthy premium to VIX. Trouble would arise here if the front-month October VIX futures began to trade at higher prices than the second-month November VIX futures. So far, that is not in the cards, but it is something worth monitoring.

In summary, we are still maintaining a positive attitude on the market, due to the bullish nature of the SPX chart. However, some sell signals are beginning to appear, so we will act on those as well. In any case, continue to roll deeply in-the-money options to lock in some profits while still maintaining profit potential if the underlying continues to move favorably.

New recommendation: MVB sell signal

A new MVB sell signal was generated when SPX traded below 6,604 on Sept. 25. This is a new signal, coming just a few days after the previous one was stopped out. This is the fourth sell signal since June, and the other three were all stopped out for losses. We have been using this indicator for more than 30 years, and it has a strong profitable track record. There has not been a period of four losing sell signals in a row in all that time. Of course, that is not a guarantee of profits for this next signal.

Buy 1 SPY SPY (Nov. 21) 650 put and sell 1 SPY (Nov. 21) 600 put in line with the market.

This position has a target of SPX trading at the -4<SIGMA> band, which is currently at 6,450 and rising. It would be stopped out if once again SPX closed above the +4 <SIGMA> band, and that band is currently at 6,700 and rising. The position of the bands changes daily, due to price chance and change in realized volatility, so we will update these targets and stops weekly.

New recommendation: Breadth-oscillator sell signal

As noted in the market commentary above, "regular" breadth (advancing issues minus declining issues, regardless of volume traded) has been struggling, and now both breadth oscillators are on new sell signals. We are going to act on this. These oscillator signals can be short term in nature and are subject to whipsaws, but they do capture large movements as well. They are often an early indicator of a larger trend to come.

Buy 1 SPY (Oct. 17) at-the-money put in line with the market.

Market insight: Earnings of interest

Earnings season is winding down for this quarter. The only stock of significance that is reporting earnings next week is Nike $(NKE)$. The NKE at-the-money option straddle expiring on Oct. 3 is fairly expensive in terms of past NKE postearnings moves. It recently priced at six points, or about 8.6% of the stock price. In the past 10 quarters, NKE has moved more than 8.6% postearnings only three times. So, this doesn't appear to be an attractive option purchase prior to the earnings release.

Follow-up action:

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 2 APH $(APH)$ (Oct. 17) 120 calls: There is no longer a trailing stop here, since the position has been rolled up several times. Roll up again at 130.

Long 1 TSEM $(TSEM)$ (Oct. 17) 67.5 call: Continue to hold without a stop. Roll up again at 75.

Long 1 SPY (Oct. 10) 660 call and short 1 SPY (Oct. 10) 675 call: This position is the trend of VIX buy signal. Stop out if VIX closes above 19 for two consecutive days.

Long 5 SVXY SVXY (Oct. 19) 51 calls: We monitor the weighted VIX futures premium via a proprietary calculation. Specifically, the calculation is currently at 1.47. This trade would be stopped out if it drops to 0.50 or lower. We will update the calculation weekly.

Long 1 SPY (Oct. 10) 660 call and sell 1 SPY (Oct. 10) 675 call: We will hold until new lows outnumber new highs on two consecutive days on the NYSE.

Long 4 ATAI $(ATAI)$ (Oct. 17) 4 calls: Raise the stop to 4.50.

Long 0 OPEN $(OPEN)$ (Oct. 17) 10 calls: These calls were stopped out on September 23, when OPEN finished below 7.20.

Long 4 XLF XLF (Nov. 21) 53 calls: Sell these calls now, since the put-call ratio is no longer on a buy signal.

Long 1 SPY (Sept. 26) 636 put: We rolled into this put last week. This is based on the breadth-oscillator sell signals. As noted in the market commentary above, the breadth oscillators have now rolled over to a sell signal, and we are taking a new position. So, sell these puts when you take the new position.

Long 4 LUV $(LUV)$ (Oct. 17) 32.5 calls: Begin to use a closing, trailing stop at 32 for these calls.

Long 2 SPLG SPLG (Oct. 17) 76 straddles: Initially, we will hold without a stop, but we intend to risk a maximum of about half the straddle price. Meanwhile, if the underlying trades at either three points higher or three points lower, then roll that side. For example, if SPLG trades up to 79, then roll the Oct. 76 calls up to the Oct. 79 calls; or if it trades down to 73, then roll the puts down.

Long 1 GLD GLD (Nov. 21) 336 call and short 1 GLD (Nov. 21) 353 call: Begin to use a closing, trailing stop at 336 for this spread.

Long 1 NVDA $(NVDA)$ (Nov. 21) 170 put and short 1 NVDA (Nov. 21) 145 put: We will hold this position as long as the weighted put-call ratio for NVDA remains on a sell signal.

Long 10 CORN CORN (Nov. 21) 17 calls: We will hold these as long as the weighted put-call ratio for corn futures is on a buy signal.

Long 2 NKE Nov (21) 72.5 puts: We will hold these as long as the weighted put-call ratio for NKE futures is on a sell signal.

Long 6 BITF $(BITF)$ (Oct. 17) 3 calls: Set a trailing, closing stop at 2.35 for these calls, basis BITF common stock.

Long 2 FTNT $(FTNT)$ (Oct. 17) 80 calls: These calls were bought when FTNT closed above 80 on September 19. We will continue to hold as long as the put-call ratio for FTNT is on a buy signal.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

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September 25, 2025 15:49 ET (19:49 GMT)

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