S&P 500 sell signals flare as options traders eye tech earnings

S&P 500 sell signals are piling up just as Wall Street heads into a loaded stretch of second-quarter earnings, according to MarketWatch columnist Lawrence G. McMillan, who says options traders are bracing for lively post-report moves in some of the market’s biggest names.

The S&P 500 was shown at 7,408.30, down 1.21%, while the Nasdaq Composite was down 2.15% and the Dow Jones Industrial Average was off 0.97%, according to MarketWatch market data. The VIX, Wall Street’s fear gauge, was up 12.38% at 18.70.

McMillan wrote that the S&P 500 has begun to struggle after breaking below support at 7,430 on July 23. He identified 7,525 as a fresh short-term resistance level and 7,300 as the next support area.

What do S&P 500 sell signals mean?

In McMillan’s analysis, sell signals are readings from technical and options-based indicators that suggest weaker odds for stocks in the near term. They are not guarantees, but they point to traders turning more defensive and to price levels that can matter if selling continues.

One of those indicators is McMillan’s modified Bollinger Band setup. He said the related MVB sell signal remains active, with a target near the negative four-sigma band, which he placed just above 7,300 and rising.

McMillan also said equity-only put-call ratios are rising and are back on sell signals. He attributed the put buying to political and economic uncertainty, saying traders may be buying protection even while they continue to own stocks.

Breadth is also flashing caution, according to McMillan. Both breadth oscillators remain on sell signals, although he said a separate signal tied to new 52-week highs on the NYSE remains positive because highs still outnumbered lows by single digits for a third straight day.

Options traders focus on Apple, Meta and Microsoft

The earnings calendar is thick next week. McMillan listed Apple, Amazon.com, Chipotle Mexican Grill, Meta Platforms, Microsoft, PayPal Holdings, Qualcomm and Starbucks among the companies due to report second-quarter results.

His table focused on stocks whose options are showing higher implied volatility, meaning the options market is pricing the chance of a notable move after earnings. A straddle uses a call and a put with the same strike price, while a strangle uses a call and a put with different strike prices.

• Meta is listed for July 29 after the close, with a “needed” move of 8.55% and 20-day average option volume of 484,966.
• Microsoft is listed for July 29 after the close, with a “needed” figure of 0.0392 and option volume of 577,123.
• Apple is listed for July 30 after the close, with a “needed” figure of 0.0068 and option volume of 1,209,274.
• Amazon is listed for July 30 after the close, with a “needed” figure of 0.0555 and option volume of 671,819.
• PayPal is listed for July 28 before the open, with a “needed” move of 7.73% and option volume of 86,518.

McMillan said his approach is to buy the shortest-term straddle possible, usually the one expiring on the Friday after the earnings date, and exit at the close of the first full trading day after results. For the stocks in his table, he pointed to Aug. 2 expirations, or the closest available date if that contract does not exist.

The volatility picture is mixed. McMillan said the VIX rose above 19 on July 23 before finishing below that level, and two straight closes above 19 would end his current trend of VIX buy signals.

Even so, he said volatility derivatives remain supportive for stocks because August VIX futures are trading below September, the rest of the term structure slopes upward, and futures are trading at a premium to the VIX. He cited Iran, interest rates, oil and other uncertainties as factors unsettling traders.

McMillan also issued a new bearish options recommendation on KeyCorp, citing a weighted put-call ratio sell signal after what he described as excess call buying. He recommended buying six Sept. 18 23 puts and holding them while that signal remains in place.

MarketWatch identifies McMillan as president of McMillan Analysis, a registered investment and commodity trading adviser. The report said McMillan may hold positions in securities he recommends, both personally and in client accounts.

This story draws on original reporting from MarketWatch.