Still in a Tight Range

Fri, 04 Dec 2009 21:10:23 +0000

Weekly comment on the market from Larry McMillan:

SPX Through 12-4-09

The S&P 500 Index ($SPX) has still not been able to break out of its 1080-1110 trading range on a closing basis. This is a very tight range that has lasted for nearly a month (since November 9th, actually). Our indicators are modestly bullish, so the odds slightly favor an upside breakout.

The $SPX chart remains mostly bullish. The rising trend line connecting the March and October lows is at about 1070 and rising. Coupled with the just mentioned support at 1080, this means that the trend is still bullish. However, a close below 1070 would be problematic for the bulls.

Equity-only put-call ratios have begun to clearly decline and thus generate buy signals. In normal times, we would be encouraged by that fact, but with the distortions caused by the heavy hedging activity since July/August, we still view the signals from these put-call ratios tentatively. These are not our primary indicators at this time.

Market breadth, on the other hand, has been a much more accurate signal during the rally since March. Breadth has given a sell signal each time that $SPX has approached the top of the trading range and then fallen back. Today was no exception, as yet another sell signal has been issued after the $SPX failure to break out on the upside.

VIX Through 12-4-09

Volatility indices have generally declined, with both $VIX and $VXO near yearly lows earlier today. Declining volatility is bullish for the broad stock market.

In summary, $SPX has been unable to break out of the trading range. Perhaps Friday’s Unemployment Report will provide a catalyst for the breakout. Traders should wait for the breakout before taking speculative positions.

[An unexpectedly good unemployment report did send the S&P 500 up 1.5% at 10 AM but it quickly fell back and closed up 0.5% at 1106.]

Upbeat End of Week

Fri, 07 Aug 2009 20:35:16 +0000

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.

Trade Naked » Time Market

Still in a Tight Range

Upbeat End of Week