The U.S. stock market is trying to find direction, but the trend is still bullish

The SPX has criss-crossed through 4100 several times, so that level no longer holds any importance. It was thought that the release of the monthly CPI numbers earlier this week might give the market some direction. But, despite some volatile gyrations on the day of the announcement, there has been no follow-through. 

So, SPX is stuck in another trading range. This one has resistance at 4200 (the early February highs) and support at 4060 (last week’s lows). The SPX chart is now working on a rising trendline, as shown on the accompanying chart. 

There is a McMillan Volatility Band (MVB) sell signal in effect (marked with a green “S” on the chart), which came about in early February when SPX closed above the +4σ “modified Bollinger Band” and then fell back. Its target is the lower, -4σ Band, while a close above the +4σ Band would stop out the sell signal.

Equity-only put-call ratios continue to remain on buy signals. The weighted ratio has  been dropping rapidly and is now down to an overbought condition at the lower end of the chart. The standard ratio isn’t dropping as rapidly any longer, but our computer analysis programs continue to rate both of these as being on buy signals. Note that the weighted ratio is back down the area where timely sell signals were issued last April and last August. However, just being at those same levels is not a sell signal; a sell signal will only occur if the ratios roll over and begin to rise.

In general, our internal indicators have remained bullish for several weeks now. Yet market breadth is the one area where things have begun to look a little negative. Technically, both breadth oscillators gave sell signals. However, these are very short-term indicators and are subject to whipsaws. So, we require that any signal last for two consecutive days. That has not happened: Both breadth oscillators are now on buy signals, in modestly overbought territory. It would take at least two days of consecutively negative breadth in order to generate sell signals.

New 52-week highs on the NYSE have been very strong since first generating a new buy signal on January 27^th. This week, new highs were above 100 on one day and have consistently been greater in number than new lows. So, this indicator (“New Highs vs. New Lows”) remains on a buy signal.

The CBOE Volatility Index was a bit “worried” about the potential of a false breakout and also worried about the CPI numbers. But, in the end, nothing came of those, so VIX is now trading back down towards its low. The trend of VIX buy signal remains in place. The first signs of any problem for stocks would be if VIX were to return to “spiking” mode — an increase of at least 3.0 points over any three-day or shorter time period. That did not happen. VIX now would have to close above 21.23 in order to return to “spiking” mode.

The construct of volatility derivatives has returned to a positive outlook for stocks. The short-term nine-day CBOE Volatility Index (VIX9D) was elevated in advance of the CPI release, but now the term structure slopes uniformly upward, and that is bullish for stocks. The term structure of the VIX futures slopes upward, too. 

In summary, while the market has been having trouble with follow-through to the upside, we are still seeing most of our indicators as being on buy signals. We are no longer carrying a “core” position but will trade the individual indicators’ signals as they occur.

New Recommendation: Manchester United PLC (MANU)

Ooption volume in Manchester United has increased to an elevated level as takeover rumors intensify, with as many as five potential buyers allegedly readying bids. Stock volume patterns are positive. There is support at 23.50.

Buy 3 MANU Mar (17^th) 25 calls

At a price of 2.60 or less.

MANU: 24.47 Mar (17^th) 25 calls: 2.50 bid, offered at 2.60

New Recommendation: conditional put buy in Garmin (GRMN)

The weighted put-call ratio for Garmin has generated a sell signal, but we would like to see confirmation from the stock price itself. If GRMN breaks down below 95, then we will act on the put-call ratio sell signal.

IF GRMN closes below 95,

THEN Buy 2 GRMN April (21^st) 95 puts

In line with the market. 

GRMN:  96.54

If the puts are bought, we will hold them as long as the put-call ratio sell signal remains in place.

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. 

Long 2 expiring PCAR1 Feb (17^th) 64.80 puts: Allow these PCAR puts to expire and do not replace them.

Long 1 SPY Feb (24^th) 412 call and Short 1 SPY Feb (24^th) 426 call:  This spread was bought when the breakout over 3940 by SPX was confirmed, at the close on January 12^th. It was rolled up on February 1^st, when SPY traded at 412. Set a stop to close out this position if $SPX closes below 4060.

Long 1 expiring SPY Feb (17^th) 404 call and Short 1 SPY Feb (17^th) 419 call: This spread was bought in line with the “New Highs vs. New Lows” buy signals. It was rolled up on January 26^th, when SPY traded at 404. It is time to roll again: sell the current spread and replace it by Buying 1 SPY Mar (17^th) at-the-money call and Selling 1 SPY Mar (17^th) call with a striking price 15 points higher. Stop yourself out of this position if new lows on the NYSE exceed new highs for two consecutive days.

Long 4 expiring NATI Feb (17^th) 55 calls: We were looking for a bidding war to occur here, since two companies were initially interested. However, nothing has happened, so sell these NATI calls if you can and do not replace them. 

Long 1 SPY Mar (17^th) 415 call and Short 1 SPY Mar (17^th) 431 call: This trade was established as a “breakout trade” when SPX closed above 4100. Stop yourself out on a close below 4020 by SPX.

Long 3 XM Mar (17^th) 15 calls: Continue to hold XM while the takeover rumors play out.

Long 1 SPY Mar (17^th) 410 put and Short 1 SPY Mar (17^th) 385 put: This bear spread was bought in line with the McMillan Volatility Band (MVB) sell signal. This trade would be stopped out if SPX were to close above the +4σ Band. We will keep you updated regarding the position of the bands each week.

Long 2 CTLT Mar (17^th) 70 calls: This takeover rumor is still “in play,” although the stock has fallen back slightly. Continue to hold CTLT while these rumors play out.

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 best-selling book, Options as a Strategic Investment. www.optionstrategist.com

©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. 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.