MarketWatch Options Trader: The S&P 500 is on the cusp of breaking through a level that might spell the end of the bear market

Note that I am not saying an increase above 4100 would absolutely be the end of the bear market but it could lead to that possibility. This current rally has closed the gaps on the so-called island reversal of early September. So the next resistance area is the August highs, just above 4300. The first support area is in 3900-3950, so a move below 3900 would be negative in that it would reverse most of the positive action of the past few weeks.

The McMillan Volatility Band (MVB) buy signal that took place in early October is still in place. Its target is the +4σ “modified Bollinger Band,” which is now at 4200 and racing higher.

Equity-only put-call ratios are technically still on buy signals. By “technically,” I mean that the computer programs that we use to analyze those charts are still rating them as “buy.” 

However, a close examination of the two accompanying charts will show they have not made new lows in the past few days. That is a bit worrisome, for these ratios should be trending lower while the S&P 500 is trending higher. For now, it is only a concern, not a sell signal, but we would like to see these ratios move to new relative lows (below their November lows) in order to re-confirm their buy signals.

Breadth indicators have swung back and forth quickly as the market has bounced around for nearly a month now. That has produced some whipsaw signals from breadth oscillators. For the record, they are now back on buy signals, but we are reluctant to put too much importance on them at this time. Yesterday (November 30th) was a 90% “up” day.

New 52-week highs on the New York Stock Exchange have still not reached 100 on any day — our minimum requirement for the setup of a potential buy signal. As a result, this indicator remains negative for now. There is still much work to be done here before a buy signal can take place.

VIX
VIX,
-2.09%
has continued to decline, for the most part, since early October. Thus, the trend of VIX is downward and that is bullish for stocks. Specifically, we had a “trend of VIX” buy signal in early November, when the 20-day MA of VIX crossed below the 200-day MA of VIX, and that is still in place. The only worry from VIX would be if it were to re-enter “spiking” mode by closing at least 3.00 points higher over any three-day or shorter period. That doesn’t appear to be a factor now, but it is worth watching for.

The construct of volatility derivatives remains a positive force for the stock market, too. The term structures of both the VIX futures and of the CBOE Volatility Indices are sloping upwards. Furthermore, the VIX futures are trading at healthy premiums to VIX. Those are bullish signs for stocks.

Finally, there is a bullish seasonal pattern in place from Thanksgiving through the second trading day of the new year. Normally, small-caps outperform big-caps during that time.

In summary, the bulls have made an impressive run since early October, and a break through the downtrend line of this bear market would need to be respected. It would not necessarily mean that the bear market is over, but we would no longer recommend carrying a “core” bearish position if that happens.

New recommendation: Aerojet Rocketdyne Holdings

The option volume in Aerojet Rocketdyne Holdings
AJRD,
+3.73%
rose sharply yesterday (November 30th) on M&A speculation. The stock is trading at an all-time high. Stock volume patterns are strong and improving. There is support at 51.

Buy 2 AJRD Jan (20th) 50 calls

At a price of 4.10 or less.

AJRD: 52.00               Jan (20th) 50 calls: 3.30 bid, offered at 4.60.

New recommendation: Horizon Therapeutics

Option volume in Horizon Therapeutics
HZNP,
+0.92%
exploded following news that the company has fielded takeover interest from multiple Big Pharma companies (Amgen
AMGN,
-0.57%,
Johnson & Johnson
JNJ,
+0.41%
and Sanofi
SNY,
+1.14%
) but that discussions were at a “highly” preliminary stage. Put option activity was relatively strong. Analysts are projecting an eventual deal price as high as $140 per share. Stock volume patterns are very strong and improving rapidly. There is support at 95-96, potentially.

Buy 1 HZNP Jan (20th) 100 call

At a price of 11.00 or less.

HZNP: 100.29             Jan (20th) 100 call: 10.40 bid, offered at 11.20

Follow-up action

All stops are mental closing stops unless otherwise noted.

We are using a “standard” rolling procedure for our SPY
SPY,
+0.09%
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 Dec (16th) 375 puts and Short 2 Dec (16th) 355 puts: This is our “core” bearish position. |As long as SPX remains in a downtrend, we want to maintain a position here. The spread is worth so little that placing a stop isn’t useful.

Long 1 SPY Dec (23rd) 392 call and short 1 SPY Dec (23rd) 408 call: This trade is based on the MVB buy signal, which was established on October 4th. We want to roll this spread up and out, since SPY has nearly reached the upper strike. Roll to the Jan (6th) 408-423 call bull spread (i.e., Buy the 408 calls, sell the 423 calls). This trade’s target is for SPX to trade at the upper, +4σ Band. The stop for this position would be if SPX were to close back below the -4σ Band. We will keep you informed if either Band has been touched.

Long 300 KLXE: The stop remains at 14.50.

Long 2 WRK Jan (20th) 32.5 calls: We will hold as long as the weighted put-call ratio remains on a buy signal.

Long 1 SPY Dec (9th) 390 call and short 1 SPY Dec (9th) 410 call: The spread is based on the rare CBOE Equity-only put-call ratio buy signal. This spread can be rolled up and out now, as well:  roll to the Jan (6th) 410-425 call bull spread. As a stop, we will close it out if SPX closes below 3900 (note the change in stop price).

Long 2 KMB Jan (20th) 135 calls: We rolled this position up last week. We will hold these calls as long as the weighted put-call ratio of KMB remains on its buy signal.

Long 2 IWM Jan (20th) 185 at-the-money calls and Short 2 IWM Jan (20th) 205 calls: This is our position based on the bullish seasonality between Thanksgiving and the second trading day of the new year. We will adjust this position if IWM rallies during the holding period, but initially there is no stop for the position, so the entire debit is at risk.

Long 2 PSX Jan (20th) 105 puts: We will hold these puts as long as the weighted put-call ratio remains on a sell signal. That is, as long as the put-call ratio is rising.

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

Disclaimer: ©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.