The S&P 500 Index (SPX) has definitively broken out on the upside, marking the commencement of a rally that commenced in late October. This surge, initially prompted by a deeply oversold condition and a favorable seasonal pattern, propelled the SPX close to the 4400 level, where it encountered resistance from various factors. However, in a noteworthy development last week, the index managed to surpass this resistance, signaling a newfound bullish momentum. Contributing to the momentum this week are favorable Consumer Price Index (CPI) numbers and significant short-covering activities.
As of now, the SPX has ascended to the initial resistance level at 4510, corresponding to the mid-September highs. Additional hurdles are anticipated at 4540 before reaching the 2023 highs at 4600. Surpassing these levels would bring into play the levels from early 2022, including the all-time high at 4800.
While the speed of the advance raises some concerns, given the existence of solid support at the 4400 level, there are noticeable gaps in the SPX chart. Four gaps are identified, with the most recent expected to be filled in a pullback to 4420. The others, situated below 4400, including the oldest one at 4100, might not be filled in the near term, but historical trends suggest that most gaps on the SPX tend to be filled eventually, possibly in the coming year.
The most recent McMillan Volatility Band (MVB) buy signal, initiated on October 31st, has already achieved its target at the +4σ Band. With the SPX surpassing this Band, a new "classic" sell signal is imminent, but it remains to be seen if it will evolve into a full-fledged MVB sell signal. Emphasizing their commitment to MVB signals, the note specifies that the "classic" sell signal occurs when the SPX closes below the +3σ Band, currently set at 4440.
Both standard and weighted equity-only put-call ratios align on buy signals, with the expectation that they will remain bullish until exhibiting a reversal. Despite some arbitrage-related distortions, the signals, particularly for stocks, are considered positive.
Market breadth, oscillating between buy and sell signals, currently favors the former, having recovered from recent sell signals. However, the breadth oscillators are in overbought territory, with a strong overbought condition noted on November 14th, which traditionally aligns well with a new upside breakout in the SPX. While current levels suggest potential swing back to sell signals, the situation is being closely monitored.
The New Highs indicator on the NYSE has shown promising signs, with the number of New Highs rising above 100 for a day, followed by 92 New Highs on the subsequent day. However, a buy signal requires 100 or more for two consecutive days, and as such, the indicator is currently in a neutral state.
The VIX, reflecting market volatility, has declined during the recent rally but remains above the 13-14 range, which represents the lows for the year. Despite the overall market breakout, "big money" appears to be cautious, evidenced by the reluctance of VIX to drop lower.
A "spike peak" buy signal remains in place on the VIX chart, lasting for about a month. While there is no existing trend of VIX signal, the 20-day Moving Average of VIX is on the verge of crossing below the 200-day MA, potentially signaling a VIX buy trend, reminiscent of the one observed in November 2022.
The outlook for volatility derivatives is decidedly bullish for stocks, as term structures slope upward, and VIX futures trade at significant premiums to VIX. Notably, the Dec VIX futures, now the front month, are not approaching the price of the Jan VIX futures, indicating a positive market sentiment.
Given the breakout in the SPX, a "core" bullish position is being held, with plans to trade other confirmed signals around this central stance.
In terms of new recommendations, Bio-Techne Corp. (TECH) has exhibited a weighted put-call ratio buy signal, aligning with a bottoming formation in recent activity. A suggestion to buy 2 TECH Jan (19th) 60 calls is put forth, contingent on the continuation of TECH's weighted put-call ratio buy signal.
Similarly, Kraft-Heinz (KHC) has signaled a weighted put-call ratio buy, accompanied by a bottoming formation. The recommendation advises buying 4 KHC Jan (19th) 32.5 calls, contingent on the maintenance of KHC's weighted put-call ratio buy signal.
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