From Larry McMillan’s Option Strategist:
SPX Through 8-7-09
$SPX has continued to rise in a very bullish fashion. Despite the market being overbought for several days now — and severely overbought for the past few — bulls have won every encounter at every level. This rally is apparently being fueled by institutional traders who hold too much cash. Short covering — another factor that boosts a rising market — is essentially non-existent as the number of unhedged shorts has diminished greatly.
The $SPX chart is bullish in that it is clearly in an uptrend, and the moving averages are all rising now (even the 200-day, barely). However, $SPX had recently risen to heights about 60 points above its 20-day moving average (and stands near 50 points today). That is “too high,” and is one indication of an overbought market. Hence a decline to the moving average might be beneficial in that it would relieve the overbought condition without harming the overall uptrend.
Weighted Put-Call Ratio 8-7-09
The equity-only put-call ratios remain on buy signals, as those ratios continue to decline. They are near the lower regions on their charts, but that doesn’t mean that sell signals are imminent. Sell signals will only occur if those averages roll over and begin to rise not likely at the current time.
Market breath oscillators are extremely overbought.
VIX Through 8-7-09
Volatility indices ($VIX and $VXO) continue to decline, and that is bullish. The $VIX chart is probably the only indicator that is not overbought. You can see from the chart (Figure 4) that $VIX has risen a bit lately, so it is not at its lows (whereas $SPX is at its highs).
In summary, our intermediate-term indicators remain on buy signals, but the weight of the overbought evidence suggest that a sharp, but short-lived correction is due.
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