Our bullish stance on the market is intact. Nearly all of the technical indicators are bullish, and most of the major averages (with the exception of the Dow) have made new highs this week. That type of price action is particularly noteworthy, and should be respected. Are we getting overbought again? Yes, perhaps, but that's what happens in these strong bullish moves. The key is to understand that pullbacks are limited -- perhaps mostly sideways -- and all they do is alleviate overbought conditions; one cannot expect to find full-fledged buy signals when the market is this strong. In fact, in an ironic twist, it would not be healthy for this continuing bull run to see the market sell off hard enough to make any of the indicators oversold and thus generate "true" buy signals.
Since the major averages have broken out to new highs, it's imperative that they hold this newly acquired ground. Thus, if they were to slip back below the week's lows, it would not be good. Those levels are 1185 for $SPX and 565 for $OEX (see Figure 1). If the market should fall back that far, it would negate the breakout, and then we'd have to re-assess the bullish move.
The equity-only put-call ratios are split, with the standard ratio making new lows (bullish), but the weighted ratio having given a sell signal -- and stubbornly clinging to it, despite new highs in the major averages. The charts are shown in Figures 2 and 3. At this point in time, we are not overly concerned with the sell signal in the weighted ratio because it is the only sell signal we have, and the averages are at new highs. However, it is probably our most trustworthy indicator and thus we will not remain bullish if it stays on a sell signal and the averages fall back below their breakout levels (1185 and 565, respectively, as stated above).
Market breadth has been very strong this week as small-cap indices outperformed the big-cap averages most every day but Thursday. Breadth is overbought again, but it was before, too, and is a pattern that can repeat itself a number of times as long as the market is in "buy mode."
Finally, volatility indices ($VIX and $VXO) have reached nine-year lows. In fact, $VIX closed today at 12.27 and traded below 12 briefly. It has not done either of those things since December, 1995 -- fully nine years ago. It should be noted that $VIX began to increase during most of 1996, but the market ADVANCED while that was taking place . Thus, it is not necessary for the market to decline if $VIX advances.
Our initially stated target for this move was $OEX 690, although research published in The Option Strategist about a month ago gave an alternate target: a 20% advance from the point when the first overbought condition abated. That occurred in December 7th, 2004, and yielded a target of $OEX 673 -- quite similar to the first target. Of course, these are just guidelines. We will let the technical indicators dictate our moves, but as long as the majority of indicators remain bullish, we will be inclined to retain our bullish positions.
Lawrence G. McMillan
email us at: info@optionstrategist.com
website link: www.OptionStrategist.com
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.
