After a shaky start to this week, the bullish scenario has played out fairly well. The major averages made new relative highs on Thursday, overcoming what had been minor resistance ($OEX: 540; $SPX 1110; Dow 10,200). This came about in a thin market that had been drifting, so it was probably easy to "manipulate" it upward, especially since that's the path of least resistance. At this point, everything points to this rally continuing to at least the top of the downtrend channel line (see Figure 1). There is perhaps one problem: Intel's (INTC) earnings projections were poor on Thursday night, but that will soon be forgotten if unemployment figures are positive on Friday morning.
Equity-only put-call ratios remain on buy signals. That's the good news. The problem, though, is that they are hanging around the top of their charts. Usually, in a strong bullish scenario, the put-call ratios would be plunging by now. The fact that they are not indicates that there is a lot of institutional put buying (of equity puts). This seems somewhat strange, since options aren't that cheap. In any case, this hedging activity has kept the put-call ratios high. If they were to exceed their recent highs, that would be negative. So far, they haven't, and so we rate them as bullish.
Market breadth has been strong on most days, although there was a very negative reading last Monday. That was not critical, though, and breadth indicators remain positive.
Finally, volatility indices ($VIX and $VXO) have slowly trending downward, and they are near 14 once again. This, too, is bullish. In fact, they will remain bullish unless they reverse upward by 3 points -- something that seems relatively unlikely now.
September is statistically the worst month. Of course, this is no secret, as it's been blasted all over the TV and financial news recently. The fact that so many are being made aware of this negative seasonality might mean that September will actually perform well this year -- in true contrarian fashion.
So, remain bullish at least until the averages hit resistance. If they break on through that resistance to the upside, then this could turn into a true intermediate-term buy signal instead of just a short-term one, as we've rated it so far.
Lawrence G. McMillan
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Lawrence G. McMillan is the author of Options As a Strategic Investment, the best-selling work on stock and index options strategies, which has sold over 200,000 copies. The fourth edition of this work was just released in March 2002. In addition, his other book, McMillan On Options, was published in October, 1996. He currently authors a unique daily fax service -- Daily Volume Alerts -- which selects short-term stock trades by looking for unusual increases in equity option volume. He also edits and publishes "The Option Strategist", a derivative products newsletter covering equity, index, and futures options, as well as "The Daily Strategist", covering much the same strategies but on a daily basis. In these capacities, he is the President of McMillan Analysis Corporation, which he founded in 1991. He has spoken on option strategies at many seminars and colloquiums in the United States, Canada, and Europe. In addition, he trades his own account actively and manages accounts for others in the option markets.
Lawrence G. McMillan has spoken on option strategies at many seminars and colloquiums in the United States, Canada, and Europe. He is a guest speaker on Bloomberg TV, CNBC and Bloomberg Radio. He also writes regularly for "The Exchange", a publication of Data Broacasting Corp., and authors a weekly columns for WorldlyInvestor.com, and MarketMavens.com. In addition, he trades his own account actively and manages accounts for others in the option markets.
From 1982 to 1989, he was in charge of the Equity Arbitrage Department at Thomson McKinnon Securities, Inc. and then was in charge of the Proprietary Option Trading Department at Prudential-Bache Securities in 1989-90. Before holding those positions, he was the retail option strategist at Thomson McKinnon from 1976 to 1980, and then traded the firm's proprietary account beginning in 1980.
Mr. McMillan holds a B.S. degree in mathematics from Purdue University (1968) and an M.S. in applied mathematics and computer science from the University of Colorado (1972).
McMillan Analysis Corporation, headed by best-selling author Lawrence G. McMillan, has been providing options oriented advice and learning tools since 1990. Mr. McMillan, with over 26 years of option trading experience, is the editor behind all advisories and services published by McMillan Analysis. We offer a wide array of learning and analysis tools for serious traders and option students. We believe an informed and educated trader makes a better client. We strive to make an important difference for our viewers. We think you'll agree, as do many of our clients, that we offer superior options products and services.
