Stock Market
Last week's upside breakout has persevered -- mostly. There hasn't been
a lot of follow-through, but the first attempt by the bears to re-take
control failed: Wednesday's post-holiday decline couldn't follow
through, and Thursday's rally put the bulls back in charge. We expect
this rally will try to work its way higher, if only sporadically, until at
least the 1290 area on $SPX. Further gains beyond that are going to be
very dependent on whether or not the rally gains strength as it
progresses. So far it has not.
The 1255-1260 area on $SPX represents support now. As long as
the average stays above that level, prices should be able to work higher.
However, a close below there would negate any positive conditions and
return the entire picture to a more bearish state. The two big overhead
resistance areas are 1290 and 1325 (the yearly highs). It's doubtful the
latter can be exceeded, but we'll have a better idea after we see how
$SPX reacts at the 1290 level.
Equity-only put-call ratios remain on buy signals. That is, the lines
in Figures 2 and 3 are declining on their charts. As you can see, the put-
call ratios are still relatively high on their charts, despite the fact that
their buy signals are a couple of weeks old. This is probably the
strongest indicator we have that there is more potential left on the upside
in this market.
Market breadth (advances minus declines) has jumped back and
forth with every whim of the market. As a result, breadth was been a
poor indicator all year long.
Finally, volatility indices ($VIX and $VXO) have remained
subdued. They are in a neutral to bullish state now, with $VIX hovering
near the 14 level. In fact, earlier this week they dipped to extremely low
levels ($VXO was near 11), but we don't expect that to last -- merely
because of the fact that actual volatility is likely to remain somewhat
elevated with the uncertainties on the horizon, not the least of which is
the Fed.
In summary, we continue to like the long side of this market for the
short term, expecting to see $SPX challenge the 1290 level at least.
Beyond that, we don't think the intermediate-term decline that started in
April is over; we expect to see the June lows tested again, but perhaps
not until late summer or early fall, 2006.
