After having been bullish for nearly two months (when all of our technical indicators turned bullish near the May bottom), and prodding, pleading, and cajoling this market higher during June, we have now abandoned our bullish stance. The price breakdowns by the major averages, in the wake of the Fed's quarter-point increase in the Fed Funds rate, was the confirmation that the upside is limited for now and that there is potential on the downside. Specifically, the indices and the breakdown levels were: $OEX at 548 (Figure 1), the Dow at 10,300, and $SPX at 1125. As discussed below, these breakdowns were accompanied by some technical sell signals, so we have to give the bearish case some credit over the short term. If the averages should rise and climb back above those levels on a closing basis, we might temper our bearishness, but at the very least the entire trading range over the last three weeks of June represents major resistance for any upward moves in the near term.
The equity-only put-call ratios have both turned to sell signals now (Figures 1 & 2). Moreover, the breakdown of the standard equity- only figures into their NYSE and NASDAQ components shows that only NASDAQ is responsible for the sell signals. This is a significant development and -- coupled with the actual price breakdowns already noted -- certainly is cause for caution.
Market breadth has deteriorated, too, and so we have a sell signal from the this indicator.
Volatility indices ($VIX and $VXO) have increased somewhat since the breakdown occurred. Their lows were near 14 and they moved above 16 this week. However, we would not consider their upward move as a sell signal unless they closed above 17 -- something they have not yet done. So, this particular indicator is not joining the others on a sell signal.
In summary, we are not wildly bearish, but we must respect the fact that prices broke down, put-call ratios gave sell signals, and so did market breadth. Hence we look for lower prices in the near term.
