The S&P 500 SPX index,
happily reaches new all-time highs, and the Dow Jones Industrial Average DJIA,
and the NASDAQ-100 NDX,
are also near all-time highs. So why does it seem like so many stocks are “struggling” in this environment?
Because very broad indicators, such as the Russell 2000 Index RUT,
or the NASDAQ Composite COMP,
are the ones that have terrible width and struggle to show even small gains while SPX goes forward.
We have seen these divergences several times over the past year – especially since June – and it has caused only small corrections in stock prices. Therefore, there may be nothing to fear, but historically it has not been a good idea when “generals” are in front of “the army”.
As for the S&P chart, it is bullish. SPX had a spectacular rally from December 20-28, gaining 270 points in just six trading days and reaching all-time highs. It has continued to post new all-time highs on several occasions in recent days, so there is now support at 4700 (the general area of old highs). It would be disappointing to see SPX fall back into its old trading range (4500-4700), but even then it should find support at 4500.
SPX’s realized volatility has finally started to ease a bit, but its historic 20-day volatility (HV20) recently hit 21%. It fell back to 18%, which is still quite high, and so this indicator is technically still on a sell signal. A drop below 15% would cancel this sell signal.
The stock-only ratios have been reversed to buy signals, at least with the naked eye. Our computer analysis programs confirm the buy signal in the weighted ratio, which comes from a high (oversold) level on its chart. The signal to buy the standard ratio is from an even more oversold height, but it is still not confirmed by computer programs.
The scale of the market reacted well when SPX had this big push over the past week, but has already started declining once again – more in terms of “stocks-only” data than NYSE data.
Even so, at the moment the width oscillators are still on buy signals. But they don’t have much leeway: even a day of strongly negative width will reverse these indicators to sell signals. We would like to see the breadth expand and become very overbought with SPX reaching new all-time highs.
The new 52 week lows have succumbed to new 52 week highs in terms of NYSE data, and that’s what we’re using as an indicator. This indicator is therefore bullish for the moment. However, when it comes to NASDAQ data, new lows are still well ahead of new highs, and now “only stocks” data has also moved into negative territory. This is just another reflection of the difference between positive large caps (NYSE) and negative small caps (NASDAQ).
Implied volatility measures supported the bullish scenario for the most part. The December 20 VIX “peak” buy signal remains in place. In addition, VIX VIX,
Now trading below its 200-day moving average, which canceled the mid-term sell signal.
However, things won’t be totally bullish until the VIX 20-day MA drops below its 200-day MA. It doesn’t seem likely anytime soon, as the two are still more than 3 points apart. The 20 day MA reversed and started to decline, so it’s somewhat bullish for stocks.
The construction of volatility derivatives has been the most bullish indicator for months now, and it still is. Futures structures have an upward slope and VIX futures trade at a premium to the VIX.
We are in the midst of the upward season for the Santa Claus Rally, and it’s a good start. It started when the market closed on December 23, when SPX was at 4725. So there has been a gain of around 75 points so far. This seasonal period lasts until the second trading day of the new year (January 4 in this case), and if the overall result is a gain, it is bullish (and normal). However, if SPX were to fall below 4725 at the Jan. 4 close, that would be a negative sign for stocks.
In summary, it is a bit like walking a tightrope to be bullish in this market when there is such a deterioration in the internals of the broad indices. However, with SPX remaining above support, a “base” bullish position is mandatory and then one can trade confirmed signals around that.
New recommendation: Arena Pharmaceuticals
As reported last week, Pfizer PFE,
and Arena Pharmaceuticals ARNA,
accepted the purchase of ARNA for $ 100 cash. The deal is expected to close in the first half of 2022 and Pfizer is funding the deal with its own cash. The trade spread narrowed a bit and we were unable to purchase the call options at our stated limit. However, we will be increasing our supply and keeping this recommendation active for another week.
Buy 2 ARNA Feb (18e) 90 calls
At a price of 4.00 or less.
ARNA: 93.00 Feb (18e) 90 calls: 3.50 offer, 5.60 free
New recommendation: Flotek Industries
Flotek Industries FTK,
was the rumor of the week. The company reportedly received a non-binding takeover offer and hired advisers to assess strategic alternatives. This caused a rush for stocks and options, with some analysts estimating the stock to be worth $ 2.50 or more. This is highly speculative, so keep your dollar risk low in this trade.
We are going to buy stocks instead of options because they are so cheap and since options – although they look cheap at 0.30 or 0.40, are actually trading at very high implied volatilities.
Buy 1,000 FTK at 1.10 or less.
FTK: Offered at 1.03 in pre-market this morning.
All stops are mental shutdown stops, unless otherwise noted.
Long 1 SPY Dec (31st) 469 put and shorts 1 SPY Dec (31st) 449 put: This spread was bought in accordance with put-call ratio sell signals only on equities. These put-call ratios were rolled over to buy signals, so sell that spread.
Long 2 CMS expiring January 21st) 65 calls: This buy is based on the buy signal of the weighted put-call ratio in CMS Energy CMS,
and this buy signal remains in effect.
Long 3 IWM Jan (21st) 232 calls: This is the end of the year seasonal bullish trade that is off to a bad start. For now, just keep holding on.
Long 2 EXC Jan (21st) 55 places: The weighted put-call ratio is no longer on a sell signal. So sell these options to close the position now.
Long 2 SPY Jan (21st) 471 calls and short 2 SPY Jan (21st) 481 calls: This was our trading range spread. We took profit on half of this trade when SPX traded below 4600 at the open on December 20th. Then on December 23, when SPX closed above 4712, we stopped the sell spread and reversed the current bullish call spread. This is our “core” long position. Stop if SPX closes below 4690.
Long 1 IWM Jan (7e) call for courses: This was bought in accordance with several buy signals that were in effect and are in effect again: (VIX “peak peak”, “oscillator differential” and width oscillators). Keep holding on without stopping.
Long Jan 2 EMN (21st) 120: Hold on as these takeover rumors unfold.
Long 1 ESPION (Jan 7)e) 467 call and shorts 1 SPY Jan (7e) 477 call: This was bought in accordance with the width oscillator buy signal on December 22. The criteria we specified in last week’s report for a buy signal were met on that date. We will hold as long as this buy signal is in effect. We will update the situation weekly.
Long 1 ESPION (Jan 7)e) 469 call: This is our Santa Claus Rally position, and half of the calls were sold on December 27, when SPY traded above 474. Sell any remaining calls at the close of the market on the second. New Year’s trading day – Tuesday, January 4.
Send your questions to: [email protected]
Lawrence G. McMillan is President of McMillan Analysis, a Certified Commodity Investment and Trading Advisor. McMillan may hold positions in the securities recommended in this report, both personally and in accounts receivable. He is an experienced trader and fund manager and is the author of the bestselling book “Options as a Strategic Investment”.
Warning: © 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 bulletin has been carefully compiled from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may hold positions in the securities recommended in the notice.