MARKET MADNESS

Traders How-To Guide for Dominating the Markets in 2021


Could It Really Be 2020 All Over Again?

Lawrence McMillan | Option Strategist

No two markets are ever exactly alike, but there are quite a few similarities between our indicators at the current time and where they stood a year ago – comparing the third Fridays of February in each case. As noted in the Market Comment section, that was the last day (February 21st, 2020) before stocks crashed into a violent, short-term bear market. 

There are a lot of similarities. Of course, this article doesn’t compare other periods in history where there were also similarities, yet the market didn’t crash. Perhaps almost every top has some of these similarities. Regardless, the following table shows the more-than-passing similarities between where the market was on the 3rd Friday of February in 2020 (on the brink of destruction) and here in 2021.
In the table, black lettering means the signals were the same now as they were heading into the 2020 top. Where there is green lettering, it means that we don’t know yet if they will be the same – they still could be.

Finally, red lettering indicates measurements which are somewhat different between 2020 and 2021.

Before discussing some of these, I want to direct your attention to the one highlighted in yellow – the NYSE cumulative Advance-Decline line. That A-D line made a new all-time high on Feb 20, 2020; $SPX had made a new all-time high the day before. This is proof positive of what I have been saying for a long time – it means nothing if the cumulative A-D line is making new all-time highs along with the stock market. It is not predictive. The only use is as a negative divergence, which there was not in this case. In fact, two days later, one of the biggest routs in history was on. I don’t know why so many technical analysts try to say that the cumulative A-D line is predictive. It is not. When both it and $SPX are making new all-time highs, it means nothing in that case. There are other major market tops where similar things occurred.

While we’re on the subject of the cumulative indicators, it is interesting to note that both “stocks only” cumulative AD-line and CVB (also based on “stocks only” data) were on negative divergences for over a month before the market broke, having last made new all-time highs on Jan 16th and 17th, 2020, respectively.


Similarities

All of the following indicators are essentially in the same place today that they were a year ago: $SPX chart (holding above the January highs), MVB sell signal, realized volatility sell signal, equity-only put-call ratio charts, breadth oscillator sell signals, and an aging $VIX “spike peak buy signal from late January, whose profitability was already guaranteed because the calls had been rolled up from when the original signal took place.

There is one other similar one – new 52-week highs vs. new 52-week lows. Both then and now, there was a long streak of dominance by new highs. The one difference, as noted in the above table, was that in 2020, the number of new lows was running at a reasonable level – roughly 80 new lows per day. At the current time, there are less than 10 new lows per day. That is a discrepancy, and it indicates that this indicator in 2021 is more strongly bullish than it was a year ago.


Differences

That leaves only a handful of $VIX indicators, all of which are different now from where they were a year ago. First is the level of $VIX itself. In 2020, it had been between 12 and 17 for several months, indicating an overbought condition. When the crossover above the 200-day moving average came, it was with $VIX near 16. Today, the level of $VIX is much higher, and so one cannot say that it’s overbought in that classic sense. Moreover, while there could be a crossover above the 200-day MA, it would occur at a much higher level of $VIX today.

Also, regarding the construct of volatility derivatives, $VIX futures were trading with a very small premium back then and easily inverted when the market started to fall. Now, these $VIX futures are trading with very large premiums, although they could still easily invert if the market began to fall sharply (green lettering in the table).


Summary

There are considerable similarities between the signals, and the timing of the signals, in 2021 and 2020. This is true for the charts as well as the put-call, breadth, and certain other data. Overall, the $VIX data is the biggest difference between 2020 and 2021. And, in my opinion, it is probably telling us that 2021 will not be a repeat of 2020. However, $VIX today is certainly influenced by knowing what happened a year ago – an advantage that traders didn’t have as we approached the end of February 2020.

In any case, there are enough similarities to give one pause – and to keep one from being complacent. Add to bearish positions as sell signals arise, and especially if $SPX breaks support levels. But there is no reason to give up on the current bull market until those things begin to happen. They will happen; it may just not be next week, as it was a year ago.
About the Author

Larence McMillan
Company: Option Strategist
Website: http://optionstrategist.com
Services Offered: Trading/Investing education, trade ideas, courses, Options

"Lawrence G. McMillan is the President of McMillan Asset Management and McMillan Analysis Corporation, which he founded in 1991. He is perhaps most well-known as the author of Options As a Strategic Investment, the best-selling work on stock and index options strategies. The book – initially published in 1980 – is currently in its fifth edition and is a staple on the desks of many professional option traders.

His career has taken two simultaneous paths – one as a professional trader and money manager, and the other as an educator and proponent of using option strategies.

In these capacities, he currently authors and publishes ""The Option Strategist"", a derivative products newsletter covering options and futures, now in its 24th year of publication. His firm also edits and publishes three daily newsletters, as well as option letters for Dow Jones. He has spoken on option strategies at many seminars and colloquia, and also occasionally writes for and is quoted in financial publications regarding option trading.

Mr. McMillan is the recipient of the prestigious Sullivan Award for 2011, awarded by the Options Industry Council in recognition of his contributions to the Options Industry.

Although he has personally been trading listed options since their inception in 1973, his professional trading career began as a proprietary trader at Thomson McKinnon Securities, where he was a Senior Vice President in charge of the Equity Arbitrage Department from 1981 to 1989. In that capacity, he traded the firm's own money – primarily in advanced option strategies and risk arbitrage. Prior to that, he had been the firm’s retail option strategist, from 1976 to 1980.

Today, as a registered investment advisor and CTA, he manages option trading accounts through his Volatility Capture program.

Mr. McMillan has a B.S. in Mathematics from Purdue University, and a M.S. in Applied Mathematics and Computer Science from the University of Colorado. He initially worked for Bell Telephone Laboratories in Whippany, NJ, from 1972 to 1976, as a computer programmer at the highest technical level of that firm."

  
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