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The S&P 500 should keep advancing — but watch for these warning signs

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The S&P 500 index finally traded at new intraday and closing all-time highs, exceeding the gap opening of Nov. 9. There has been a brief pullback to the old highs (at 3644) to test the breakout. So far, the retest has held, and with this being a positive seasonal period for the market, stocks should be able to advance — even though November’s strong rally pushed a number of indicators into overbought territory (remember, overbought does not mean sell). There is further support at 3550, and then at 3500.

As long as the S&P 500
SPX,
+0.10%

remains above 3500, its chart is in a bullish mode. A close below 3500 would be game-changer and would turn the chart bearish.

The “modified Bollinger Bands” (mBB) are beginning to tighten slightly, as realized volatility is slowly decreasing. But SPX has not moved outside of either the +4σ or -4σ Band, so no signals have been forthcoming since early September.

Equity-only put-call ratios are falling rapidly once again. Thus, these ratios remain on buy signals, albeit in very overbought territory. There has been heavy call buying for several weeks now, and it does not appear that it is going to abate soon.

There have been several daily CBOE equity-only put-call ratio readings below 45, and even a couple below 40. That represents an extreme amount of call buying, and that is dangerous for the market from a contrarian point of view. However, there will not be sell signals from these ratios until they roll over and begin to rise.

Breadth continues to be a strength for the market. Our breadth oscillators remain on buy signals, in modestly overbought territory. In addition, cumulative volume breadth (CVB) continues to make new all-time times, including on Wednesday. The cumulative advance-decline line has not made a new all-time in the past six days, but it is very close to doing so. It is way too early to say that a negative divergence has developed.

New lows are basically nowhere to be seen, so new highs easily outdistance them, and thus the “new highs vs. new lows” indicator remains positive for stocks.

Volatility continues to slowly decline. This past week, VIX
VIX,
-1.13%

 traded at its lowest levels since February. The trend of VIX is downward, and that is bullish for stocks. The VIX 200-day moving average is still rising, though, and it is much higher – above 32.

But it will start to decline soon unless VIX rises back above the 200-day average. That seems unlikely, and we would have other negative indicators setting off alarms before that happened (such as VIX returning to a “spiking” mode). The previous VIX “spike peak” buy signal of late October has “expired,” but the market is still riding the momentum of that well-timed buy signal.

The construct of volatility derivatives remains modestly bullish. The CBOE Volatility Index term structure slopes upward. The VIX futures are trading at a premium to VIX. Finally, the VIX futures term structure only slopes upward in the front end, and then it flattens out after that. So, “mostly bullish” is the result.

The record-setting move in November continues into December. We have seen this movie before (2017 and 2019, which eventually led to very nasty corrections or even bear markets). So, we remain bullish, but we are certainly not going to get complacent. We will trade confirmed signals whenever they occur.

New recommendation: Ambarella

Ambarella
AMBA,
+4.67%

 has been a strong stock in its own right, and now there are takeover rumors, with Amazon.com
AMZN,
-0.14%

being mentioned as a possible buyer. Option volume exploded on that rumor, and stock volume patterns are very strong and improving.

Buy 2 AMBA Dec (31st) 85 calls

At a price of 5.00 or less.

AMBA: 85.69 Dec (31st) 85 call: 5.50 offered

New recommendation: Novus Capital

Novus Capital
NOVS,
+1.41%

 is a SPAC (Special Purpose Acquisition Company). There has been a lot of extreme speculation in SPACs, and this one is joining the fray. One pattern that seems to exist is that the SPAC jumps higher on the first news of a deal, then pulls back. But if it can break out over the highs of the first announcement, then there is a good chance of a strong rally. In this case, Novus spiked up to 13 in late September on the first announcement that it is going to bring AppHarvest public. When the AppHarvest IPO takes place, Novus will change its name and stock symbol.

The stock is now approaching the breakout level above 13 and will be a “buy” if it can hold that level.

Conditional call buy in NOVS:

IF NOVS closes above 13 on any day,

THEN buy 4 NOVS Jan (15th) 12.5 calls.

NOVS: 12.95 Jan (15th) 12.5 call: 1.90 offered

Follow-up action

All stops are mental closing stops unless otherwise noted.

• Long 500 CLIR common stock: The closing stop remains at 1.85.

• Long 5 IVZ Dec (18th) 16 calls: Since we rolled up, we are no longer using a trailing stop here. Continue to hold.

• Long 500 shares of SURF common: Stop yourself out on a close below 7.50.

• Long 1 SPY Dec (18th) 364 call and short 1 SPY Dec (18th) 376 call: A SPY call spread was originally bought on the VIX “spike peak” buy signal that occurred on Oct. 29 and then rolled up.

• Long 2 CLGX Dec (18th) 75 calls: Hold without a stop while the takeover rumors play out. This past week, a CoreLogic
CLGX,
+0.20%

 official said the company is committed to “running a full sales process.”

• Long 2 SPY Dec (11th) 363 calls and short 2 SPY Dec (11th) 378 calls: These were bought when SPX finally closed above 3588 on Nov. 16. Change the stop: stop yourself out on a SPY close below 357.

• Long 2 VIX Dec (16th) 25 puts and short 1 VIX Dec (16th) 50 put: we are looking for VIX to fall below 18 or rise above 32 by expiration.

• Long 2 ACM Dec (18th) 50: Raise the closing stop to 49.10.

• Long 2 IWM Dec (18th) 183 calls: We bought these for the post-Thanksgiving trade. Roll up to the 191 strike if the iShares Russell 2000 ETF
IWM,
+1.05%

 trades at 191 at any time. We will eventually roll to January options, as we plan to exit on the second trading day of 2021.

Send questions to: lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the bestselling book “Options as a Strategic Investment.”

Disclaimer: ©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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Mutual Funds Weekly: These money and investing tips can help you read the market’s signs and stay on your path

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