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Stock Market
The Option Strategist Weekly Updater
January 26, 2006
After Wednesday's clear upside breakout, it seemed as if the bearish case was dead -- that the bulls had finally taken charge, moving $SPX above 1430 to new 6-year highs, and dragging many other indices with it. However, the picture changed dramatically after today's huge market decline. $SPX crashed back through what should have been support at 1430. Looking at the chart of $SPX (Figure 1), the highs at 1440 are now resistance, while the lows at 1408 should provide support. There is a chance that the recent support at 1420 might hold (and that is also where the 20-day moving average currently is), but for that to be true, the market would have to do a quick about-face again.
The equity-only put-call ratios are mixed. The weighted ratio just recently rolled over to a buy signal, which wasn't a terrific prediction, while the standard ratio continues to drift sideways on a sell signal. Recall that the standard ratio was affected somewhat by dividend arbitrage in the last month, but that doesn't prevent a buy signal from occurring -- yet none has.
Market breadth has been skittish as well. It expands tremendously when the market rallies, and collapses just as much when the market declines. One can't really draw any conclusion from this data, other than to certify that there's a herd mentality at work these days, so everyone tries to buy or sell at once. Very little independent thinking, it seems; but that's what the world of massive hedge fund and institutional domination looks like.
The volatility indices fell to nearly all-time lows this week, before shooting higher today as the market declined. We all know that when $VIX is 'too low,' the market is subject to some selling. However, the last few times that $VIX has
bounced higher from the 10 level, any declines were short-lived. We continue to view $VIX as generally being in a trading range between roughly 10 and 13 (it closed today at 11.22). If it were to rise above there, then a true sell signal would be unleashed.
In summary, we know that one day doesn't make a market certainly not the upside breakout on Wednesday, and likely not the big decline on Thursday. But Thursday's decline certainly was a surprise to the bulls. From a technical viewpoint, the failed upside breakout is usually a very negative formation. As a result, it certainly looks like the lower end of the range ($SPX 1408) will be tested. If that does not hold, a full-fledged bearish leg could emerge. But for now, let's call it a trading range and see if the support can hold.
Stock Market
The Option Strategist Weekly Updater
February 2, 2006
Stock Market
The market rallied strongly the past three days. Whether it's due to the "January Seasonal Effect," (which I believe is the case), or to some other extraneous events -- such as the Fed's benign comments on inflation makes little difference. $SPX has now broken out to yet another new 6- year high. Hopefully, it will be able to make more of it than last week, when it broke out to new highs on the 24th, only to collapse in a torrent of selling on the 25th. If this upside breakout can hold, then the bulls are in charge once again, and the "trading range" scenario can be discarded.
Both equity-only put-call ratios are on buy signals again. The weighted ratio rolled over to a buy signal over two weeks ago, but the standard ratio just chimed in yesterday. These buy signals are not emanating from a deeply oversold level (i.e., not from high on their charts), but that doesn't really matter a lot. These buy signals will now remain in effect until the ratios roll over and begin to rise once again.
Market breadth (advances minus declines) has been very strong this week, as you might imagine. Breadth has been a confirming, rather than leading, indicator for months now, and this week has seen no change in that status.
Volatility indices have been the most consistently bullish indicator all along. $VIX has not risen above the 13 level, on a closing basis, in months. As long as that is the case, the market can work higher -- as long as $VIX doesn't get too low. Eventually, $VIX will break out decisively above 13, and that will probably be bearish when it happens, but at the present time, that doesn't look to be a likely event.
In summary, we expect the market to continue to work higher, as there are no sell signals amongst our technical indicators at the present time. Short-term caution flags might be raised if $VIX closes at or below 10, or if the breadth oscillators break down after a couple of days in which declining issues lead advancing issues. But those are minor points. Bullish positions can be maintained as long as the major technical indicators refrain from sell signals.
