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McMillan Market Commentary 5/7/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 07 May 2004 - 03:30 PM

Stock Market


Most of the indicators have worsened recently, and the market has
moved lower. This action fits well within the concept we have been
espousing that a market decline to the March lows might be the
catalyst needed to set up some serious buy signals. That hasn't
occurred yet, but we seem to be moving in that direction.

The major indices ($SPX, $OEX, and the Dow) made new
relative lows on Thursday (i.e., new lows since the April highs), but a
late rally pulled them back above those levels. Nevertheless, the trend
is down and the next stop could well be the March lows (see Figure 1).

The equity-only put-call ratios -- which generated new sell signals
last week -- have gotten even more negative by moving to new highs
(See Figures 2 and 3). As long as they are rising, they remain on sell
signals.

Breadth figures have been very negative this week, and thus are
oversold. While these oversold readings might indicate that a
sharp, short-lived rally could take place, they aren't cause for buying
the broad market on an intermediate-term basis.

Finally, volatility indices have risen as well, but have yet to break
out. A clear breakout above 18 by these indices ($VIX and $VXO)
would be a sell signal. $VXO did trade aobve 18 during the day on
Thursday, but didn't close there (Figure 4).

The number of companies reporting good earnings continues to
abound. However, that isn't helping stock prices, for it appears that
most of the good news has been discounted in advance. In fact, certain
studies show that the best earnings reports occur right at a market top.
Logic might fool one into buying these stocks after they report great
earnings, but that's the wrong thing to do when the market is not
responding positively to good economic news. We'll have another
chance on Friday morning to see how the market responds to the
Unemployment Report.

Overall, we seem to be in the throes of a decline to the March
lows, at which time there is a decent possibility that multiple buy
signals can arise. However, these buy signals are not guaranteed.
We'll have to observe the market at that time to see if it's a "buy" or
not. On the other hand, if the market experiences a premature rally
right now (in response to the oversold condition, for example), it will
meet plenty of overhead resistance and most likely won't get far on the
upside.


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