MW The stock market now is clearly overbought - but overbought does not mean 'sell'

By Lawrence G. McMillan

Apple shares and big bank earnings are in focus as stocks hit another record

The S&P 500 index SPX has continued to rise, registering new all-time highs again this past week. A minor gap has been filled on the SPX chart, which is a positive thing. There are support levels at 6,060, 6,020 and 5,920. Any move below 5,920 would be bearish, but I am not expecting that anytime soon. This upside breakout to new highs seems much stronger in terms of market internals than the false breakouts that occurred this past February.

When SPX is at all-time highs, there is no formal overhead resistance, but the "modified Bollinger bands" (mBB) can be useful. Currently, SPX is trading above the +4<SIGMA> band, which is an overbought condition, but not necessarily a sell signal. If SPX closes below the +3<SIGMA> band, that would generate what we call a "classic" mBB sell signal. We don't trade those, for they have proven to be too subject to whipsaws. However, if there is further downside action after the "classic" sell signal is generated, then a McMillan volatility band $(MVB.AU)$ sell signal could be generated. There is no guarantee that current market conditions will actually lead to an MVB sell signal.

Equity-only put-call ratios have continued to fall. That is bullish for stocks, and as long as these ratios are declining, stocks can advance. The fact that they are making new relative lows on their charts is something of an overbought condition, but it won't be a sell signal unless these ratios reverse upward and begin to trend higher.

Breadth has been strong for a while now, and both breadth oscillators remain on buy signals. They're also in overbought territory, but when the SPX index is making all-time highs, it is a positive thing to see the breadth oscillators become overbought. That indicates that there is broad market participation in the rally. Cumulative volume breadth $(CVB.AU)$ continues to make new all-time highs, both in "stocks only" terms and in terms of NYSE data. That is strong confirmation of the new highs being made by SPX.

New 52-week highs on the NYSE have continued to outnumber new lows, so this indicator - which only recently generated a buy signal - remains positive. This buy signal would be stopped out if new lows were to outnumber new highs for two consecutive days on the NYSE.

Realized volatility has continued to fall, and the 20-day historical volatility of SPX (HV20) is down to 10%. That is not yet in a danger zone. It would have to fall to 8% or less to flash some warning signs.

VIX VIX has continued to remain subdued, even during most negative news flashes. So that means that both buy signals related to VIX are still in place: the "spike peak" buy signal of June 24, and the trend of VIX buy signal of June 4 (both are marked on the right-hand side of the accompanying VIX chart). These will remain in place as long as VIX remains below its 200-day moving average.

The construct of volatility derivatives has retained its positive outlook on the stock market as well. The term structures of the VIX futures are sloping much more steeply upward now (especially in the front end). The same can be said of the Cboe volatility indices. Moreover, the VIX futures are trading at a healthy premium to VIX - another positive sign for stocks.

In summary, we're bullish on the stock market, with SPX making all-time highs and almost every one of our internal indicators on buy signals. However, we take note of the various overbought conditions and will be acting on any sell signals that might be confirmed. "Overbought does not mean sell" is our motto, so we will not attempt to anticipate sell signals merely because there are overbought conditions. The market can remain overbought for a long time. In any case, continue to roll deeply in-the-money calls upward.

New recommendation: Apple $(AAPL)$

There is a new weighted put-call ratio buy signal in Apple (AAPL). AAPL options are somewhat expensive right now, so we are recommending a call bull-spread instead of an outright call purchase.

Buy 2 AAPL (Aug. 15) 210 calls and Sell 2 AAPL (Aug. 15) 230 calls in line with the market.

As usual, we will hold this spread as long as the weighted put-call ratio of AAPL remains on a buy signal.

Next week, the largest U.S. banks - Goldman Sachs Group (GS), JPMorgan Chase (JPM), Citigroup (C), Wells Fargo $(WFC)$ and Morgan Stanley $(MS)$ - will report earnings. Although these banks are covered by a large number of analysts, sometimes the options market will give us a clue as to what, if any, earnings surprises might be in store.

Let's starting with GS. It is due to report earnings on Wednesday, July 16, before the market opens. The "best" options estimate of what the earnings hold in store is the price of the near-term straddle.

At the close on Wednesday, July 9, the GS (July 18) 697.5 straddle was trading at 29, with the stock trading at 697. The straddle cost 4.16% of the stock price. In other words, options traders "predict" that GS will move 4.16% on next week's earnings announcement, but the straddle does not give any indication of whether that move will be higher or lower.

How does this compare with recent postearnings actual moves? The following table shows the one-day moves in GS after each of the previous 10 earnings reports.

Table 1: GS recent moves, postearnings

   Earnings date  1-day move 
   4/14/2025      1.92% 
   1/15/2025      6.01% 
   10/15/2024     -0.07% 
   7/15/2024      2.57% 
   4/15/2024      2.92% 
   1/16/2024      0.71% 
   10/17/2023     -1.59% 
   7/19/2023      0.97% 
   4/18/2023      -1.69% 
   1/17/2023      -6.43% 

Just two of those moves exceed 4.16% (either plus or minus), so it doesn't appear that the straddle buy would be a good idea. I wouldn't necessarily say that the straddle should be sold, though, for that could entail a large risk.

Perhaps we can gain a clue as to which direction the stock is likely to move. That can sometimes be seen in the options trading as well, if we look at the percent of calls traded versus total options volume on the stock. A distortion in that percentage as earnings approach can be useful.

In the case of Goldman, let's look at last quarter, when earnings were reported on April 14. The following table shows the 15 days leading up to the earnings, ending with Friday, April 11. The percentage of total options volume in GS that was call options is shown in this table.

Table 2: GS call volume prior to first-quarter 2025 earnings

   Date       % calls 
   GS  2025-0324  33.6% 
   GS  2025-0325  33.3% 
   GS  2025-0326  34.4% 
   GS  2025-0327  34.1% 
   GS  2025-0328  34.7% 
   GS  2025-0331  36.4% 
   GS  2025-0401  36.5% 
   GS  2025-0402  36.2% 
   GS  2025-0403  40.0% 
   GS  2025-0404  41.9% 
   GS  2025-0407  43.2% 
   GS  2025-0408  44.7% 
   GS  2025-0409  43.4% 
   GS  2025-0410  46.9% 
   GS  2025-0411  44.8% 

You can see that the percentage of call volume increased steadily heading into the earnings. In fact, it turned out that earnings were slightly better than expected, and GS rose 1.92% (previous table) on the day after the earnings - or about 9 points.

So, that data may have some usefulness. Let's look at what this quarter is showing.

Table 3: GS call volume prior to second-quarter 2025 earnings

   Date       % calls 
   GS  2025-0623  42.8% 
   GS  2025-0624  42.7% 
   GS  2025-0625  39.6% 
   GS  2025-0626  38.7% 
   GS  2025-0627  36.9% 
   GS  2025-0630  38.4% 
   GS  2025-0701  38.4% 
   GS  2025-0702  37.6% 
   GS  2025-0703  37.3% 
   GS  2025-0707  37.4% 
   GS  2025-0708  38.2% 

There are still a few more trading days until GS earnings are reported next week on June 16, but the pattern recently has seen the percentage of calls decreasing (or the percentage of puts increasing, if you prefer). That would indicate a slight bias to the downside - or that earnings might be a slight miss. But this isn't really a very large change in the percentage of calls, so it's not likely to be worth a trade.

We ran the same numbers for the other four big bank stocks mentioned. First, below is a table that shows the current near-term, at-the-money straddle price for each stock. The data for GS is repeated, for reference. In addition, the table shows how many times in the last 10 earnings reports the one-day move after the earnings exceeded the straddle price shown in the table. One can see that, overall, the current straddles are somewhat expensive and would not be good buys for this quarter's earnings reports.

Table 4: Straddle price vs. recent postearnings moves for all 5 big bank stocks

   Stock  Earnings date  Straddle price  Last 10 
   GS     7/16 am        4.16%           2 
   JPM    7/15 am        3.64%           4 
   C      7/15 am        4.57%           3 
   WFC    7/15 am        4.77%           3 
   MS     7/16 am        4.59%           4 

So, the next step is to see if the percentage of options volume that is calls gives us any clues. As with GS above, let's look at last quarter to see how things worked out. The following table shows the percentage of calls traded for each of these stocks, for the 15 days leading up to earnings. The GS data is repeated from Table 2, for reference. At the bottom of the table, the stock moves on the day after the earnings were reported is also shown.

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July 12, 2025 15:00 ET (19:00 GMT)

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