The market has clearly broken its downtrend of this year, but where does it go from here? Our indicators remain bullish, if overbought, so we expect an intermediate-term advance. Typically, the market tops out in the first year of the Presidential cycle (next year), so this rally could extend for three to six months. The chart of $OEX (Figure 1) is a two-year chart and it shows the advance from the bear market lows to early this year, when the down-trending channel occurred. Now that the market has broken out of that channel, if one were to make a symmetric projection, he would arrive at a target of 690 for $OEX. A similar projection for $SPX would yield a target of 1320. Such long- term projections are cloudy, to be sure, but we feel these are reasonable targets -- still well below the all-time highs, but sufficiently high enough to be a valid projection for the broad market strength we have seen on this breakout.
The equity-only put-call ratios continue to remain one of the most bullish indicators (see Figures 2 and 3). They continue to drop in a straight line, which is their most bullish formation. They will not turn bearish until they roll over and begin to rise. That might not happen for a while. They really aren't even that low on their charts (with the possible exception of the weighted ratio), and in a strong bull market one would expect them to drop farther than the levels that generated sell signals in February of this year.
Meanwhile, market breadth has been very strong, as noted in the feature article this week. The ramifications of extremely strong market breadth are intermediate-term bullish, although there may need to be some sideways market action in order to relieve the overbought breadth condition before the rally can resume.
Finally, volatility indices ($VIX and $VXO) have remained low. Both have flirted with the 13 area lately, although traders seem reluctant to let them fall lower than that. At these low levels, one might consider $VIX "overbought" as well. Our general rule of thumb, though, is that $VIX won't generate a sell signal until it rises three points from its lows. Thus, $VIX would need to close above 16 to generate a sell signal.
In summary, while all of these indicators are overbought in some ways, it is important to remember that "overbought" does not mean "sell." If this market is as strong as the indicators seem to imply, we would expect only a shallow to sideways correction before higher prices are seen once again.
