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McMillan Market Commentary 9/24/4


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#1 TTHQ Staff

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Posted 24 September 2004 - 10:27 AM

Stock Market

The market has struggled after bumping into overhead resistance. That struggle has now turned more negative, with Wednesday's rather steep decline. Some of the technical indicators are beginning to turn negative, but we want to see more of a consensus before taking bearish positions in broad market index options.

All of the major big-cap averages ($SPX, $OEX, $DJX) have fallen below their 20-day moving averages. This ends the recent bullish uptrend, and indicates that long positions in those indices' options should be closed out. The chart in Figure 1 shows that the down-trending channel is still intact. If sell signals develop in other technical indicators, it's possible we could traverse to the lower ends of the channel -- which would be to the 510-515 area on $OEX and perhaps as low as 1050 on $SPX. However, since we don't have a uniformity of sell signals yet, those levels are not targets, but are merely items of note.

The equity-only put-call ratios have not yet confirmed the bearishness of the major index charts. The standard ratio has "wiggled" a little bit higher, but it hasn't actually issued a sell signal (Figure 2). The weighted ratio (Figure 3) is still clearly falling -- and thus is still on a buy signal. Finally, the breakdown of the standard figures in their NYSE and NASD components (chart, above right) shows no sell signals yet, either.

Breadth has deteriorated this week, too. Another day of predominantly negative breadth will push the breadth indicator to a sell also. Volatility indices ($VIX and $VXO) made new lows (Figure 4). In fact, $VXO closed below 13 (on Tuesday) for the first time in nearly nine years. They subsequently jumped higher as the market fell sharply the next day. The lowest close on $VIX is 13.16. Thus, we would consider a rise above 16.16 (a 3-point rise from the lowest close) as a sell signal. So far, that hasn't happened.

In summary, we have negative price action on the major index charts and a sell signal from the "stocks only" oscillator. Those are the only confirmed negative signals. That's not enough for us to recommend taking a bearish position in $OEX or $SPX options, but it is enough to cause us to exit our longs in those indices. We would need to see sell signals from volatility and from put-call ratios before we turned aggressively bearish on the market. So far, those haven't materialized.

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