MW The stock market is seeing more '90% days.' Here's what that means for your money.

By Lawrence G. McMillan

Volatility favors the bulls for now, with the S&P 500's upside target near 6,150

It is significant that Wednesday's sharp decline in the S&P 500 SPX was a "90% down day." In such a trading session, either declines were nine times the number of advances, or declining volume was nine times the advancing volume, or both.

This is the fourth "90% day" for the U.S. market in the past month. Two have been 90% up days and two have been 90% down days. When the frequency of 90% days increases, that is not good for stocks. A large number of volatile days in the market is a bearish indicator. The chart below shows this data since 1998.

I don't have a specific indicator based on this data, but during the major financial crises, the number of 90% days in a 50-day period of trading days has reached 20 or more. Right now, the number of 90% days is trending higher, and that is a warning sign to at least continue to expect more volatility. If the number of such days begins to decline, then that would be positive for stocks.

Meanwhile, the S&P 500 has continued to hold above 5,800, the area that had been an important resistance level for some time but is now the market's support level. That is positive, but there are some signs of potential trouble from the internal indicators. There is also support at 5,700 and at several levels below that. However, a move below 5,700 would revert the SPX chart back to a bearish status. As it stands now, though, the bulls are in charge. The upside target remains the all-time highs near 6,150.

We are beginning to see the emergence of sell signals, but further confirmation is needed for most of them.

But there is a more negative development possibly taking place. SPX had been trading above its +4<SIGMA> "modified Bollinger band" (mBB) for several days. On May 21, it fell back below the +3<SIGMA> band, and that creates a "classic" mBB sell signal. We don't trade those, though, because there have been too many whipsaws from those signals. If SPX falls further, that would confirm a McMillan Volatility Band $(MVB.AU)$ sell signal. Specifically, if SPX trades at or below 5,795, the MVB sell signal will be in place. That level will not change going forward, but there is no guarantee that the sell signal will actually occur.

Equity-only put-call ratios have continued to fall sharply, and this indicator remains strongly bullish as a result. These ratios would only turn bearish for stocks if they rise and begin to trend upward. Both are nearing the lower levels of their chart, which means they are getting into overbought territory, but that alone is not a sell signal.

Market breadth had been strong during the rally but has begun to weaken over the past few days. A tentative sell signal is setting up. If breadth is negative again today, the breadth oscillators will have confirmed sell signals. That would be a significant change.

In a related category, we also follow cumulative volume breadth $(CVB.AU)$. When CVB makes a new all-time high, SPX normally follows. This past week, CVB did indeed make a new all-time high - both in terms of "stocks only" data and New York Stock Exchange data. That is a strong intermediate-term buy signal, and it is certainly worth taking a position based on it.

New highs and new lows have been battling back and forth, but neither has exceeded 100 for two consecutive days. So the "new highs versus new lows" signal remains in a neutral state.

The indicators based on VIX VIX have also been in a neutral state. The last "spike peak" buy signal reached fruition more than a week ago, and the trend of VIX sell signal was stopped out last week. It is now possible that a new trend of VIX sell signal will set up. If VIX closes above its 200-day moving average for two consecutive days, that would generate the sell signal. VIX did close above its 200-day MA yesterday, so another close there today would be enough. Currently that MA is at 19.80. The area is marked with a bracket on the lower right of the accompanying VIX chart.

The construct of volatility derivatives is clinging to a bullish outlook for stocks. By that I mean that the term structures of both the VIX futures and of the Cboe volatility indices are sloping upwards, but just barely. If that should invert, it would be a large negative for stocks.

So we are beginning to see the emergence of sell signals, but further confirmation is needed for most of them. Meanwhile, that CVB buy signal is reliable and augurs for SPX to eventually make a new high. It is possible that both could be correct: short-term sell signals and a longer-term bullish move. In any case, we will continue to trade confirmed signals and will continue to roll deeply in-the-money positions.

CVB buy signal

As noted in the market commentary above, cumulative volume breadth has made a new all-time high (both in terms of "stocks only" data and NYSE data). That normally means that SPX will follow along and do the same. There is not usually a long lag time for SPX to get to the new highs. The all-time high for SPX is 6,150 and for the SPDR S&P 500 ETF Trust $(SPY.NZ)$ SPY it is 613.

Buy 2 SPY (July 18) 613 calls in line with the market.

Potential MVB sell signal

If SPX trades down to 5,795 at any time, that will complete the necessary criteria for a McMillan Volatility Band sell signal.

If SPX trades at 5,795, then Buy 1 SPY (July 18) at-the-money put and Sell 1 SPY (July 18) put with a striking price 50 points lower.

Yes, the skew in the puts is so steep that this spread is 50 points wide. We will update targets and stops if this position is taken.

Potential trend of VIX sell signal

If VIX closes above 20 on May 22, then VIX will have closed above its 200-day moving average for two consecutive days. That is a trend of VIX sell signal.

If VIX closes above 20 for two consecutive days, then Buy 1 SPY (July 18) at-the-money put and Sell 1 SPY (July 18) put with a striking price 50 points lower.

If this position is established, we will then hold it until VIX closes back below the 200-day moving average for two consecutive days.

Follow-up action:

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.

Also, for outright long options, roll if they become 8 points in-the-money.

Long 2 APH (June 20) 80 calls: We will hold as long as the weighted put-call ratio for Amphenol $(APH)$ remains on a buy signal. Roll up again at 90.

Long 8 IEF IEF (June 6) 93.5 puts: We will hold this position as long as the weighted put-call ratio for Treasury notes remains on a sell signal.

Long 1 TSEM (July 18) 42 call: The long calls were rolled up when Tower Semiconductor $(TSEM)$ traded above $42 on May 14. Roll the calls up again at 50.

Long 1 SPY (June 6) 587 call and short 1 SPY (June 6) 605 call: This the position based on the breadth oscillator buy signal. It has been rolled up at least twice. We will continue to hold without a stop, although we will update the status of the breadth oscillators in our weekly report. If they turn negative again, we will exit this position.

Long 1 SPY (Jun 20) 591 call and short 1 SPY (June 20) 620 call: This the position based on the equity-only put-call ratio buy signals. It was rolled up when SPY traded at 591 on May 15. These buy signals are still in effect. We will update their status weekly.

Long 2 DLR (June 20) 160 calls: We will hold as long as Digital Realty Trust's (DLR) weighted put-call ratio is on a buy signal.

Long 5 CCL $(CCL)$ (July 18) 20 calls: We will hold as long as Carnival Corp.'s weighted put-call ratio remains on a buy signal.

Long 5 CZR $(CZR)$ (June 20) 29 calls: We will hold as long as Caesar's Entertainment's weighted put-call ratio remains on a buy signal.

Long 1 SPY (Sept. 19) 585 call and short 1 SPY (Sept. 19) 635 call: This is the position based on the differential between implied and historical volatility. Continue to hold.

Long 3 IP (July 18) 50 calls: We will hold as long as the weighted put-call for International Paper $(IP)$ ratio remains on a buy signal.

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 adviser. 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

-Lawrence G. McMillan

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May 22, 2025 16:09 ET (20:09 GMT)

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