There were more bears than bulls last week for the first time since late April
“…The Nov. 15 candle that produced the bearish ‘island reversal’ marked the low, as support from the October high at 5,880 worked with the SPX’s upward-sloping 20-day moving average before the Nov. 15 gap lower was filled last week, indicating the bulls remain in control…there is work to be done on the rally from short-term support. The mid-November closing and intraday high in the vicinity of 6,000-6,008 is overhead.”
– Monday Morning Outlook, Nov. 25, 2024
Looking back on the holiday-shortened Thanksgiving week, nothing changed with respect to bulls remaining in control. In fact, after the S&P 500 Index (SPX — 6,032.38) failed to sustain a move through resistance in the 6,000-6,008 region Monday through Wednesday, options bulls exerted their might in a shortened session on Friday, with a move through 6,000-6,008. Keep in mind that during half-day sessions like on Friday, volume is thin.
Last week’s breakout will be more convincing going forward if the daily lows are above previous highs from early last week. As we move into December, the SPX is very much on the path to my 6,200-6,215 year-end target, derived from a mid-September inverse “head and shoulder” breakout.
“…Many U.S. equity benchmarks are battling potential round-number resistance. Plus, Bitcoin (BTC) and the CBOE Market Volatility Index (VIX — 15.24) are trading in the vicinity of round numbers, with 15 being considered round-number support for the latter.”
– Monday Morning Outlook, Nov. 25, 2024
Equity market options bulls also exerted control from the perspective of round-number resistance levels. The Dow Jones Industrial Average (DJI — 44,910.65) had more room to run to its next major round number than other indices, but a rally last week pushed it just below the 45,000 mark. But the SPX, Nasdaq Composite (IXIC — 19,218.17), and Russell 2000 Index (RUT — 2,434.73) cleared round numbers that were in play either overhead or just below going into last week’s trading.
Moreover, the Cboe Market Volatility Index (VIX — 13.51) moved below 15.00 to its November low. But Bitcoin (BTC — 97,064.43) failed to rally above the psychologically important 100,000 level, even as the “risk-on” trade was evident in the equity market.
“…As of now, these are risks that you should have on your radar in the days ahead. In the absence of the SPX breaking below a support area, the risks take on less meaning, but this could change quickly.”
– Monday Morning Outlook, Nov. 25, 2024
The except above related to sentiment-based risks related to the VIX potentially bouncing off the 15 level, and the sentiment among equity option buyers on SPX and Nasdaq-100 (NDX — 20,930.37) components. The current optimism level as measured by buy-to-open put/call volume data shows optimism that has historically spelled trouble for those benchmarks.
The current optimism among equity option buyers remains a risk, but in the context of price action, the risk is downgraded unless and until the equity benchmarks give option buyers a reason to become more pessimistic. With new all-time highs on Friday, buyers are not feeling pressure to unwind the current optimism.
The same is true for active investment managers, who are nearly fully invested and around levels at which short-term peaks have occurred. But like equity option buyers, they are not yet feeling the need to unwind long positions.
With the VIX now below 15.00, there is room to decline to the 12.30 level, where it troughed in May and June. But during that period, the VIX barely moved as the SPX rallied. That is something both bulls and bears should note going forward.
Finally, not all segments of the market are enthusiastic, especially with the SPX’s new all-time high on Friday. Last week’s American Association of Individual Investors (AAII) survey found that 37% claimed to be bullish, and 39% said they were bearish. It is the first time there were more bears than bulls since late April, which preceded a monster rally in equities into mid-July.
Per the chart below that measures how short-term option players are playing the SPDR S&P 500 ETF Trust (SPY — 602.55), note in the days leading up to the breakout above 600 that there were liquidations at this strike. There is a slight bias in trading out-of-the-money puts over out-of-the-money calls, suggesting a fair amount of index and ETF option buyers betting on a short-term decline.
My advice would be to stay with the momentum, and use options to manage sentiment-based risks. With earnings season mostly behind us, premiums are low, so the leverage is outstanding and you can play momentum names with less dollars at risk by utilizing options in lieu of underlying stocks.
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