MW Stock investors head into November saying thanks to a market that keeps on giving

By Lawrence G. McMillan

Stay the course, but be cautious

The S&P 500 index SPX gapped higher two days in a row this week - a show of strength. (Those gaps are marked with circles on the upper right of the SPX chart below.)

There's support now for SPX at the old highs - near 6,750 - in addition to the well-tested support at 6,500 to 6,550. Those support levels are marked with red horizontal lines on the SPX chart. It is possible that a pullback toward support at 6,750 could take place - SPX shed 1% on Thursday - but it would not be a game changer if it did. This market seems to be strong enough that it may not need such a pullback to "refuel."

Mind the gaps

Now, about those S&P 500 chart gaps: Some analysts believe most gaps need to be filled, and so a pullback toward support at 6,750 would do that. (Conversely, there are some obvious gaps that never get filled; witness the one back in April, also circled on the below chart.) What is almost comical, though, is the interpretations of two breakout gaps to new highs. Some view that as a sign of strength; to others, it's a sign of exhaustion. Frankly, you can probably prove whatever you want to as far as gaps are concerned. What is the important thing now is the 6,750 support level. If that is broken, it will be a large negative, and if support at 6,500 were broken, sellers would surely flood in.

Despite the market's strength and the positive nature of the SPX chart, some indicators are showing weakness. So far, they have had little to no effect, but market tops can be "rounding" affairs with an accumulation of sell signals before a break occurs - as opposed to market bottoms, which can be sudden and V-shaped, such as the one back in April. To that end, SPX has not risen far enough to reach the +4<SIGMA> "modified Bollinger band," so the McMillan volatility band (MVB) sell signal is still in place.

The equity-only put-call ratios curled upward and began to rise a little more than a week ago. That is normally a sell signal for the broad stock market, especially when these signals come from such a low level on their chart. But these sell signals have not been borne out with lower SPX prices, and now the put-call ratios are turning lower again. The computer programs we use to analyze these ratio charts continue to "say" that sell signals are in effect, but the look of it raises questions - marked by the question marks on the charts below.

Another internal indicator - market breadth - has been struggling to stay positive, and certainly it is not as optimistic as the SPX chart. On the breakout itself by SPX, breadth was positive for a few days, and that was encouraging. However, over the past two days, breadth has weakened considerably, and the NYSE-based breadth oscillator is back to a sell signal, while the "stocks only" breadth oscillator is teetering on the brink of a new sell signal.

The market breadth I am referring to here is the "traditional" breadth: the daily number of advancing issues minus the number of declining issues. Another type of breadth has been much more positive and in tune with the market: cumulative volume breadth (CVB), the daily accumulated total of volume on advancing stocks minus volume on declining stocks. CVB has been hitting all-time highs with some regularity, just like SPX. This past week, CVB made an all-time high on Oct. 24 and Oct. 27. This is strong confirmation of the new highs being made by SPX.

Realized volatility, in the form of the 20-day historical volatility of SPX (HV20), has remained elevated ever since the market's last "tariff tantrum" on Oct. 10. This is a negative for stocks, too, in that a rise in volatility is generally not good for stock prices.

Implied volatility VIX had its moment, exploding to 29 in the first half of October. As dire as that seemed to be - and has been in the past - it amounted to nothing this time. VIX is back to about 17 now, almost as if nothing had happened. As a result, there are two buy signals in effect for the broad stock market: the "spike peak" buy signal (green "B" on the accompanying VIX chart) and the trend of VIX buy signal (pink "B" on the chart). As long as VIX remains below its 200-day moving average (currently just above 19), these buy signals will remain in effect.

The construct of volatility derivatives is back to a fully bullish position for stocks as well. The term structures of both the VIX futures and of the Cboe volatility indices continue to slope upwards. Moreover, there is a relatively large premium on the VIX futures once again. So, despite the negativity associated with an inversion in the term structure during the week of Oct. 17, the market has recovered.

We remain overall bullish, in line with the SPX chart, but will continue to trade all confirmed signals when they appear. Continue to roll deeply in-the-money positions.

Earnings spotlight

Several important earnings reports are due next week, and while it's too early to price the straddles, one can observe the median move over the past 10 earnings reports:

Palantir Technologies( PLTR): 17.8% of the stock price. If the straddle can be bought cheaper than that, there is an edge in favor of the straddle buy. (Earnings due Nov. 3 after the close of trading.)

Uber Technologies (UBER): 5.7% of the stock price. (Earnings due Nov. 4 before the market opens.)

Qualcomm $(QCOM)$: 6.8% of the stock price. (Earnings due Nov. 5 after the close.)

DraftKings $(DKNG)$: 4.4% of the stock price (Earnings due Nov. 6 after the close.)

New recommendation: ProShares Short VIX Short-Term Futures ETF $(SVXY)$

When the premium is large on the VIX futures, the ProShares Short VIX Short-Term Futures ETF SVXY rises in value. The reason is that this ETF is short the actual VIX futures. When there is a large premium on those futures, there is "time decay" as time passes, and the futures lose value, all else being equal. Of course, a rising VIX would cause SVXY to fall in value even if the futures retained a premium. Generally, though, when the futures premium is large, it can be beneficial to own SVXY or buy calls on it.

Buy 4 SVXY (Nov. 21) 50 calls in line with the market

We compute a weighted futures premium composite, and we call that calculation VOLFUTA. It currently stands at 2.30. This trade would be stopped out if it were to fall to 0.50 or less. We will update its value weekly in this report.

New recommendation: Whirlpool $(WHR)$

There is a new weighted put-call-ratio buy signal in Whirlpool (WHR). The company reported earnings this week and the stock enjoyed a brief rally, which has mostly dissipated. Regardless, the previous put-call-ratio buy signal from a roughly equivalent level last June worked out well, so we are recommending this one now - although we are putting a condition on it.

If WHR closes above 75, then buy 2 WHR (Dec. 19) 75 calls in line with the market.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a standard rolling procedure for our SPDR S&P 500 ETF Trust $(SPY)$ 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 $(APH)$ (Nov. 21) 130 calls: The stock is making new highs. Raise the trailing closing stop for APH to 128 for these calls.

Long 1 TSEM $(TSEM)$ (Nov. 17) 75 call and short 1 TSEM (Nov. 21) 85 call: Raise the trailing, closing stop to 72 for this TSEM spread. Roll the entire spread up 10 points if TSEM trades at 85.

Long expiring 1 SPY (Oct. 31) 687 call and sell 1 SPY (Oct. 31) 702 call: The spread was rolled up when SPY traded at 687 on Oct. 28. Now, roll to the following: Buy 1 SPY (Nov. 21) 685 call and sell 1 SPY (Nov. 21) 705 call. We will hold until new lows outnumber new highs on two consecutive days on the NYSE.

Long 4 ATAI $(ATAI)$ (Nov. 21) 6 calls: Use a trailing closing stop at 5.20 for these calls.

Long 2 NKE $(NKE)$ (Nov. 21) 72.5 puts: We will hold these as long as the weighted put-call ratio for NKE is on a sell signal. Roll down to the NKE (Nov. 21) 65 puts.

Long 1 SPY (Nov. 21) 665 put and short 1 SPY (Nov. 21) 615 put: This is the position based on the MVB sell signal. Continue to hold until SPX trades at either of the +/-4<SIGMA> bands.

Long 2 BXP $(BXP)$ (Jan. 16) 72.5 puts: We will hold this position as long as the weighted put-call ratio for BXP remains on a sell signal.

Long 400 BEEM $(BEEM)$ common: Use a trailing, closing stop at 2.75 for this position.

Long 1 SPY (Nov. 28) 685 call and short 1 SPY (Nov. 28) 700 call: This is the position based on the most recent VIX "spike peak" buy signal. Stop out if VIX closes above 28.99 on any day. Otherwise, we will hold for 22 trading days. The original spread was rolled up when SPY traded at 685 on Oct. 28.

Long 2 BSX $(BSX)$ (Dec. 19) 100 calls: We will hold these calls as long as the weighted put-call ratio for BSX remains on a buy signal.

All stops are mental closing stops unless otherwise noted.

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 the book, "Options as a Strategic Investment." www.optionstrategist.com.

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