It's Not Too Late for the Stock Market to Fight Off the Bears

The S&P 500 index (SPX) has been fluctuating within a trading range of 5,870 to 6,100. A consecutive two-day close below 5,870 would signal a bearish trend. With the index closing at 5,827 on January 10, there is only one trading day left for bulls to prevent the onset of bearish momentum. While there is additional support at 5,670 and 5,780, a dip to these levels would nullify the current bullish outlook.

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Equity-only put-call ratios are climbing, with the weighted ratio rising faster than the standard one. These increases indicate bearish sentiment in the market. Notably, the weighted ratio has surpassed the "clutter" observed during the sideways trading in October and November, while the standard ratio has yet to clear a similar hurdle.

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Market breadth has been weak since early November, despite a brief improvement about a week ago. Although the breadth oscillators issued buy signals recently, their short-term nature makes them prone to reversals. Over the past two days, breadth has deteriorated again, putting those signals at risk. On a brighter note, cumulative volume breadth (CVB) reached an all-time high on January 6, suggesting that SPX could follow suit and set a new high soon.

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However, new lows on the NYSE have continued to outnumber new highs, except for one day. This keeps the indicator in bearish territory, issuing a sell signal. To reverse this, new highs would need to outnumber new lows for two consecutive days.

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The realized volatility sell signal remains active as the SPX's 20-day historical volatility (HV20) continues to rise, currently standing at 16%. This heightened volatility is a bearish signal for stocks.

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An attempt to generate a VIX buy signal was made recently when the VIX dropped below its 200-day moving average. However, this signal was invalidated when the VIX climbed back up. With the VIX and its 20-day moving average now above the 200-day moving average, a VIX sell signal has been triggered. This trend suggests that volatility is increasing, which is negative for stocks.

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Despite these bearish signals, the structure of volatility derivatives has remained bullish. The term structure of VIX futures continues to slope upward, reflecting optimism. However, if front-month January VIX futures start trading above February contracts, it would signal growing concern.

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New Recommendations

‍SPY Conditional Sell Signal
A new VIX sell signal, combined with sell signals from HV20 and equity-only put-call ratios, suggests bearish positioning. Since SPX closed below 5,860, a bearish SPY trade is recommended:

• Buy one SPY (Feb. 21) at-the-money put and sell one SPY (Feb. 21) put with a strike price 30 points lower.
  This position should be held as long as two out of three indicators remain bearish. Updates will be provided weekly.

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Amazon (AMZN) Puts
A new put-call ratio sell signal has developed for AMZN. If the stock breaks below $218:

• Buy one AMZN (Feb. 21) 215 put.
  Hold the position as long as the put-call ratio remains bearish.

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Deckers Outdoor (DECK) Puts
This recommendation remains active. A weighted put-call ratio sell signal exists for DECK. If the stock falls below $202:

• Buy two DECK (Jan. 17) 205.5 puts.
  Hold the position as long as the weighted put-call ratio remains bearish.

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Market Insight: January Early-Warning System

The first five trading days of the year often provide insight into the market's direction for the year ahead. This is distinct from the "January barometer," which predicts the annual trend based on the month's performance. Historically, both systems have an accuracy rate exceeding 83%. For context, the Dow Jones Industrial Average has finished higher in 55 of the past 75 years, a 73% success rate.

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In 2025, SPX closed 2024 at 5,881 and posted a modest gain of 0.6% during the first five trading days. This minor uptick offers some hope for the bulls. Historically, when SPX gains between 0.3% and 0.9% during the first five days, the market has ended the year higher 10 out of 12 times.

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The recent "Santa Claus rally" period, covering the last five trading days of 2024 and the first two trading days of 2025, ended with a slight loss of -0.5%. While this seasonal indicator was negative, the early-year gains offer a glimmer of optimism for bulls.

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Follow-Up Actions

All stops are mental closing stops unless otherwise noted.

• SPY Core Bullish Position: Hold long 1 SPY (Jan. 24) 607 call. Exit if SPX closes below 5,870 for two consecutive days.
• WBA Calls: Hold long 4 WBA (Jan. 17) 9 calls amid takeover rumors.
• SPY Bearish Position: Maintain long 1 SPY (Jan. 24) 589 put while breadth-oscillator sell signals persist.
• DKNG Puts: Exit long 4 DKNG (Jan. 17) 42 puts as the put-call ratio has flipped bullish.
• Vertical Spreads: Roll positions based on strike hits, maintaining the same expiration and strike distance unless instructed otherwise.

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Final Thoughts

The January early-warning system offers a positive signal, but short-term indicators provide more actionable insights. The focus remains on adapting to market moves and trading based on reliable short-term signals.

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