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McMillan Market Commentary 11/5/4


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#1 TTHQ Staff

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Posted 05 November 2004 - 09:38 AM

Stock Market

The strong trend of the market, in the wake of the re-election of President Bush has produced an upside breakout that should be heeded. This is the most important new development this week, and most of the technical indicators have moved in agreement with the breakout. Both $SPX and $OEX broke out above the downtrend line that had marked this year's declining market. $SPX, in fact, is very near its yearly high, while $OEX -- which has not been as strong as $SPX in recent months -- still might face overhead resistance.

The equity-only put-call ratios have been steadfastly on buy signals for a couple of weeks, and they continue in that mode. Neither one is particularly overbought, so the strength in these ratios might continue for some time. In fact, the standard ratio had reached a new yearly high (i.e., oversold condition) before this most recent buy signal.

Market breadth has been very positive, and these indicators are overbought. However, it is common that breadth indicators get very overbought at the beginning of a strong rally -- and they stay that way during the rally. So, just because breadth is overbought does not mean that one should consider it anywhere near a sell signal.

Finally, volatility indices ($VIX and $VXO) plummeted after the election results were in. They had remained fairly high as the election approached -- in case there was a volatile reaction to the election news. In fact there was (on the upside). But once the move began, $VIX dropped like a stone, losing nearly 3 points of value, from 16 to 13 before rebounding slightly.

In summary, this upside breakout should be respected -- even if there is a pullback from what has quickly become a short-term overbought situation. A close below Wednesday's lows would negate the breakout, but otherwise it remains intact.

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