SPX Through 11-6-09

Equity-only put-call ratios appear to still be feeling the effects of the heavy hedging activity that took place this summer and fall. For the record, the standard ratio is on a buy signal, while the weighted ratio is on a sell.

Market breadth has been a reliable indicator during the rally since the March bottom. The recent correction saw our breadth oscillators reach extremely negative, oversold levels. This week, however, breadth has generally been positive, culminating with a very strong showing of advances over declines today.

VIX Through 11-6-09

We view the current market as bullish. We would expect $SPX to exceed the resistance at 1070 (it would be bearish if that resistance held) and challenge the highs at 1100. The wild card is today’s Unemployment Report; if it is negative a $SPX falls back from here, then it would be in a trading range between 1030 and 1070 and we’d have to await a new breakout at a later time. [At 3 PM EST, with an hour to go, the S&P is flat.]

Options order flow has the most value when it goes against the grain of the stock. Like this one.

Houston-based oil driller Smith International (SII) is down $1.29 to $25.22, as a pullback in crude oil weighs on the drillers Monday. Crude was recently down $2.42 to $67.13 a barrel. However, while SII shares are falling, sentiment seems bullish. July 30 calls are the most actives, with 3,250 traded and 80 percent of today’s volume hitting ask-side. Another 1,290 July 37.5 calls traded, with 70 percent traded ask-side. While today’s volume doesn’t yet exceed open interest, ISEE sentiment data indicate that some customers are buying to open. Implied volatility is up to 62, from about 58 late Friday.

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Last week’s indicator review found that “As long as new lows exceed new highs, we have to look at this as a potential trend shift that could take us well into May’s trading range.” We did, indeed, see those new 20-day lows continue to outpace new highs, taking us briefly below 900 in the S&P 500 Index before bouncing higher late in the week.

The bullish momentum that we saw sustained from the March lows (top chart) has been lost, a situation that commonly occurs during topping processes. New 65-day highs, which peaked early in June, have steadily declined since then and now stand barely higher than new lows (middle chart). Meanwhile, the advance-decline line specific to S&P 500 stocks–a great feature from the Decision Point service–actually broke May lows last week before bouncing.

With a majority of S&P 500 sectors retreating from their bullish trending status, we now stand in a broad trading range between May’s lows and June’s highs. At this juncture, given the relative strength of NYSE Cumulative TICK and intermediate-term new highs/lows, I see this more as a correction within a bull market move than as the start of a fresh bear market. A move below May lows, particularly accompanied by new 65-day lows exceeding new highs, would lead me to re-evaluate that stance.

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