Options Traders See Buy Signal Despite Negative Market
A key volatility indicator has flashed a buy signal for stocks for the first time in months, according to Lawrence G. McMillan of MarketWatch.
An options volatility tracker has produced a 'spike peak' buy signal for stocks for the first time in months. This bullish signal from the options market arrives at a time when internal market indicators are broadly negative, according to Lawrence G. McMillan in a MarketWatch opinion piece.
Market breadth readings, which measure the performance of the majority of stocks rather than just major indexes, are negative on many fronts. McMillan argues that if the market were graded on a curve, current conditions would likely result in a failing grade and much lower prices. Higher oil prices and higher interest rates, both typically seen as harmful for stocks, are also present. Despite these headwinds, the benchmark S&P 500 index remains only a little more than 2% below its record close from August 13.
The Volatility Signal
The specific buy signal comes from the Cboe Volatility Index, commonly known as the VIX. McMillan reports that the VIX recently generated a 'spike peak' buy signal. This type of signal occurs when the VIX rises sharply and then reverses course, often indicating that a short-term market decline may be ending. The author notes this is the first such signal in several months, suggesting options traders are betting on a market rebound.
Conflicting Market Internals
While the VIX signal is positive, other technical measures tell a different story. McMillan points to several breadth indicators that are currently bearish. The negative breadth suggests the recent market strength is being driven by a narrow group of large-cap stocks, not a broad-based rally. This divergence can sometimes precede a broader market pullback.
The Current Market Context
The S&P 500's resilience near its highs, despite poor breadth and unfavorable macro conditions like high oil and interest rates, creates a puzzle for investors. McMillan's analysis presents the conflicting data without declaring a definitive outcome. The piece highlights the tension between a bullish signal from the options market and bearish signals from market internals. The author attributes the analysis and the specific 'spike peak' buy signal observation to his own market monitoring framework.
The MarketWatch column presents two opposing views of the market's health. Traders are left to weigh the bullish implication of the VIX buy signal against the caution suggested by deteriorating market breadth. The article concludes by noting the S&P 500's proximity to its August record, a concrete detail that shows the market's current stalemate.
