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McMillan Market Commentary 4/2/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 02 April 2004 - 09:44 AM

Stock Market


Stock prices have rebounded with a vengeance. It has only been a
week since prices bottomed out, but already the major averages have
recovered much of that lost ground, and have risen into areas that
probably will provide some resistance. This strong rally has quickly
produced some overbought conditions and -- coupled with the
resistance that lies overhead -- it's hard to imagine this current leg of
the rally carrying much further.

$SPX is the strongest of the major averages, and it has already
blown through the first resistance area at 1122. Neither $OEX nor the
Dow have equaled that feat yet. Even if these first resistance areas are
overcome, there is still resistance all through the trading ranges that the
markets traded in, during late January and the entire month of
February. Figure 1 shows this information for $OEX. The pertinent
first resistance levels that have yet to be breached at 557 for $OEX and
10,400 for the Dow (QQQ doesn't have quite the same type of chart,
but there is considerable resistance near 36).

The only indicators that are on sell signals are the equity-only
put-call ratios. They never have issued buy signals, which is a little
suspicious. There have been times in the past when arbitrage and
hedging have so distorted the put-call ratios as to render them useless
for periods of time. The clue as to when this is happening is if both the
market and the put-call ratios rise together for a period of time. Since
they've been rising together for only a week, we're not ready to denigrate their
usefulness yet, but we are certainly keeping an eye of them. The current charts
appears in Figures 2 and 3, and you can see that they are still rising.,
which is bearish.

Market breadth has been strong as well. But breadth indicators are
getting quite overbought, which we don't think is healthy. In other
words, we would prefer to see a base built after the market corrected
a "W" bottom, with solid buy signals (including the put-call ratios),
instead of the "V" bottom that we have so far. Generally, when it
appears that a "V" has formed, it is only the first part of a "W," and the
market subsequently retreats to retest its lows. We still feel that is a
strong possibility.

Finally, volatility indices ($VIX and $VXO) have retreated back
to nearly their lows. This left a buy signal on the chart (see Figure 4).
Previous buy signals are marked on the chart, from late 2003. You can
see that once $VIX retreated to its formerly low levels, the rally ran
out of steam. We expect the same thing to happen here.

By the time you read this, the unemployment figures will have
been released. Good or bad, we expect the market to sell off after the
figures are announced. Separately, we feel that the market has risen
too quickly after the sharp selloff of a couple of weeks ago. "V"
bottoms are rare, and considering that the areas where we had buy
signals have already gotten quite overbought -- market breadth and
volatility -- we expect a retest as soon as this current rally runs out of
steam.

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