The market's new big worry has nothing to do with stocks — and that's the problem

Despite a positive overall market outlook driven by the S&P 500's strong uptrend, Lawrence G. McMillan notes emerging technical divergences, including new MVB and market breadth sell signals, suggesting underlying weakness amid a potential government shutdown concern. While equity-only put-call ratios are overbought but declining, and VIX remains subdued, these new sell signals prompt recommendations for a SPY bear put spread and an at-the-money SPY put.

Analysis

The S&P 500 maintains a positive primary uptrend with key support levels intact, but the market is exhibiting significant internal weakness and facing external headwinds from a potential U.S. government shutdown. Technical analysis reveals critical divergences, as new sell signals have been generated by both the McMillan Volatility Band (MVB) and market breadth oscillators. This negative breadth is a notable concern, as the index's advance to new highs has not been supported by a broad number of advancing issues, suggesting a lack of widespread participation. Furthermore, while equity-only put-call ratios are technically bullish as they continue to decline, they are in overbought territory from heavy call buying and a reversal would trigger a sell signal. In contrast, several indicators remain supportive: Cumulative Volume Breadth is strong, indicating large institutions are deploying significant capital into a concentrated group of stocks; NYSE new highs continue to dominate new lows; and the VIX remains subdued with its term structure sloping upward, which is bullish for equities. This creates a conflicted technical picture where the strong headline index performance masks underlying fragility, warranting a cautious stance despite the prevailing uptrend.

Key Decisions for Investors

• Given the emergence of new sell signals from the MVB and breadth oscillators, consider implementing hedges or tactical short positions on the S&P 500 to protect against a potential correction, even as the primary price trend remains positive.
• Monitor for a reversal in key supporting indicators, specifically a rise in the VIX above its 200-day moving average (near 19) or an upward turn in the declining equity put-call ratios, as these would add significant weight to the bearish case.
• Recognize that the market's strength is not broad-based, with strong institutional volume concentrated in fewer stocks, reinforcing the need for careful stock selection rather than relying on index performance alone.