We have been waiting for the market to break out over resistance -- to
show that price action could be as bullish as some of the technical
indicators were becoming. That has now occurred, in the wake of the
Fed's announcement. I'm not completely in agreement with the super-
bullish interpretation of the Fed statement (and I think some of the
buying was due to end-of-quarter window dressing), but the reasons
don't really matter. An upside breakout has occurred and thus we expect
the major indices to trade higher at least for the short term.
$SPX had struggled with the 1260 area. Two rallies were turned
back there, and the 200-day moving average (one which is often
followed by institutional traders) had been holding back progress as well.
In addition, the declining 20-day moving average was overhanging the
averages as well. Today's rally blew through all of those, turning the
technical picture bullish -- at least as long as it doesn't slip back below
1255, say.
The equity-only put-call ratios had already turned bullish (Figures
2 and 3) and were just waiting for confirmation from price action and the
other technical indicators -- confirmation which is now verified.
Market breadth has been poor all year, and it was deeply oversold
for most of the past month. With today's action, both breadth oscillators
have given buy signals. A truly long-lasting rally would be led by
extremely oversold breadth readings in the coming days and weeks.
Failure to achieve that may give us some indication of just how strong
and long-lasting this rally can be.
Volatility indices ($VIX and $VXO) plunged today. That is a bit
strange, because a new era of higher volatility has almost certainly been
issued in. Even if the Fed has temporarily stopped raising rates, the
market is going to live in fear that they might start again. That, coupled
with the aftermath of a very nasty decline in April and May is certainly
going to keep volatility high, in our opinion. Yes, we understand that
$VIX dropped because put sellers were hammering $SPX and $OEX
puts with abandon today, but that doesn't necessarily mean the market
won't be volatile.
This short-term breakout should carry the averages up to at least the
early June highs -- about 1290 on $SPX. The jury is still out on what
happens after that. It is possible that an intermediate-term rally will take
place, but we are not jumping on that bandwagon yet. The June lows are
eventually going to be retested, we're sure, even if it takes several
months to do so. This could develop into the kind of bottom we saw in
August-October 1998 or July-October 2002. But, for now, enjoy the
rally while it lasts.
