‘Sell’ signals are flashing across the stock market now. But bulls still have one chance.

The first new sell signal has to do with realized volatility. The 20-day Historical Volatility (HV20) of SPX had dropped as low as 8% about a week ago. It is now up to 12%, and that is a sell signal. The last time this indicator flashed a sell signal was in December 2021, so it is worth heeding. This sell signal would be stopped out if the HV20 falls back to 9% or lower. 

The McMillan Volatility Band (MVB) buy signal is still in effect because SPX has not traded at either of the +/-4σ Bands since the signal was first generated in mid-March. We have adjusted our position a couple of times since then, though.

As of yesterday’s close (April 26^th), both of our equity-only put-call ratios have rolled over to sell signals. This is a new and significant development. To the naked eye, one can see that both ratios have curled upward. In addition, our computer analysis programs verify that these are changes of trend and that the sell signals are confirmed. We expect these ratios to be rising for a while now, and they will remain on sell signals as long as that is the case.

Market breadth has been abysmal, as it has been negative for the last seven trading days in a row. That not only produced sell signals as of the close of trading on April 20, but it has forced these oscillators down into somewhat deeply oversold territory. Of course, oversold does not mean “buy,” and the market can decline sharply even while these oscillators are technically oversold. 

New 52-week lows on the NYSE have begun to increase in number as well. There have been more than 100 on each of the last two days. That is greater than the number of New 52-week Highs on each of those days as well. Combined, this is a new sell signal from this indicator. This is more of an intermediate-term indicator usually, as it only generates a couple of signals per year. This sell signal will remain in effect until new highs outnumber new lows for two consecutive days.

VIX traded down to 17, which was its lowest point since November 2021. Obviously VIX was reacting to the sharp decline in realized volatility. In a recent Market Insight column, we showed that VIX does not deviate greatly from HV20 unless HV20 gets very low. At its nadir, HV20 was 8 and VIX was 17.

VIX really couldn’t rise while the realized volatility of the market was so low. But now that HV20 is beginning to rise, so is VIX. If VIX rises at least 3 points over any three-day period, it will return to “spiking” mode. That currently would require a VIX close over 19.89 for a “spiking” mode to exist. The stock market can decline sharply while VIX is in “spiking” mode, but eventually a new “spike peak” buy signal will occur. 

Meanwhile, the other important piece of information on the VIX chart is its 200-day moving average — currently at 23 and declining. The trend of VIX buy signal is still in effect (it was launched in the circle on the VIX chart). That buy signal would be stopped out if VIX were to close above its 200-day MA. A full-blown trend of VIX sell signal would not occur, though, until the 20-day MA of VIX rises above the 200-day. That doesn’t seem likely to happen soon, since the two moving averages are about five points apart.

The construct of volatility derivatives is still somewhat bullish in its outlook for stocks. The term structure of the VIX futures slopes upward out through September and levels off after that. The CBOE Volatility Index term structure is showing some distortion, though, as the 9-day Index (VIX9D) has risen above VIX. That is mainly due to the fact that FOMC is next week, and so is the monthly Employment Report. Thus this “distortion” is not necessarily a lasting change in the term structure.

Overall, the market picture is certainly taking on a much more bearish tone — although not universally bearish. New- or recent sell signals from HV20, equity-only put-call ratios, the breadth oscillators and “new highs vs. new lows” should not be ignored. But as long as the signals surrounding VIX and its tradeable products are still bullish, the bulls still have a chance to recover. A S&P 500 close below 3950 would be cause for taking a more bearish stance.

New recommendation: Equity-only P-C ratio sell signals

Based on these new sell signals from the equity-only put-call ratios, we are going to take on a new bear spread:

Buy 1 SPY June (16^th) at-the-money put

And Sell 1 SPY June (16^th) put with a striking price 30 points lower.

We will hold this position until the equity-only put-call ratios roll over, forming a peak, and begin to decline. 

New recommendation: Realized volatility sell-signal

As noted in the market commentary above, there has been a new sell signal generated by the fact that the 20-day Historical Volatility of SPX (HV20) dropped to 8% and now has risen back above 10% (it’s at 12%). This is a new sell signal.

Buy 1 SPY June (16^th) at-the-money put

And Sell 1 SPY June (16^th) put with a striking price 30 points lower.

This sell signal will remain in effect until HV20 falls back to 9% or lower.

Market Insight: 50 years of option trading, and now: the one-day VIX

This week marked the official 50^th year anniversary of the beginning of listed option trading — April 26, 1973, when the CBOE first opened its doors and traded 911 contracts on that first day. It is from that beginning that the huge world of listed derivatives trading that we know today has developed.

Also, 40 years ago, in 1983, the CBOE introduced the first index options, on OEX (which was originally called the CBOE Index, and then later became the S&P 100 Index). Then, 30 years ago the first volatility index (VIX) was created. The calculations for VIX were changed in 2003 and have been applied over many issues and time frames.

This past week, the CBOE introduced its 1-day volatility index (Symbol: VIX1D) in response to the immense popularity of 0DTE (zero days to expiration) options. Its first trading day was April 24. This is not necessarily a predictor of market direction, but it does give traders some idea of how expensive the 1-day options on SPX are. It has already shown that it can be quite responsive. On it’s first day, it hovered near 10. But the next day SPX was down 65 points and VIX1D rose 60%, to 16 from 10.

Follow-up action: 

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 1 SPY Mar (19^th) 410 call and Short 1 SPY May (19^th) 425 call: This position was bought in line with the MVB buy signal. It was rolled up 15 points on each side, when SPY traded at 410 on April 3^rd. Then it was rolled out last week. The target here is for SPX to trade at its +4σ Band, which is at roughly 4180 and rising slowly. The position would be stopped out if SPX closes below the -4σ Band.

Long 1 SPY May (19^th) 395 call and Short 1 May (19^th) 415 call: This spread was bought in line with the equity-only put-call ratio buy signals. Since these put-call ratios have now rolled over to sell signals, this spread should be sold today.

Long 1 SPY May (5^th) 415 call and short 1 SPY May (5^th) 428 call: This spread was bought in line with the breadth oscillator buy signals that occurred around March 27^th. Then it was rolled up last week. The breadth oscillators rolled over to sell signals earlier this week, so this spread should now be sold.

Long 3 ARNC May (19^th) 27 calls: Option volume has decreased slightly here, but the takeover rumors are still in place. Continue to hold ARNC without a stop, while these rumors play out.

Long 3 CARR June (16^th) 42.5 puts:  We will hold these CARR puts until the put-call ratio rolls over and begins to decline – i.e., as long as the sell signal is in place on the put-call ratio chart.

Long 4 NDAQ Jun (16^th) 55 calls: We will hold these NDAQ calls as along as the weighted put-call ratio is on a buy signal.

Long 400 JFIN: The stop for JFIN remains at 3.50.

Once again, AIZ did not close above 120, so we did not act on the put-call ratio buy signal. We are cancelling this recommendation now.

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 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.