This market is exhibiting all the classic behavior of a traditional bear
market: sharp, but short-lived rallies sprinkled in amongst an ongoing
downtrend. The rallies are so fierce that, at face value, they appear to be
an end to the decline. But since they have no follow-through to them,
the bears continually reassert their will.
$SPX has established a new support level in the 1220-1228 area.
Do you notice how each support level is a little lower than the one
before? That's classic bear market action as well. Also each rally dies
at a slightly lower level: the May top was at 1290, then the June top was
at 1280, and now it appears that July may have topped out around 1265
(although admittedly July isn't over yet). While we don't necessarily
give a lot of credence to the 100-day moving average of $SPX, it is
interesting to note that it has contained all rallies since it was first
breached in mid-May. It remains at 1280 today. The $SPX chart is one
of the more negative aspects of the indicators we follow (although it's
not as negative as the charts of QQQQ, $DJX, or $RUT -- all of which
made new lows or came within a small fraction of doing so this week).
The $SPX chart will remain negative until one of the previous resistance
areas can be overcome.
The equity-only put-call ratios have been one of the most steadfast
bullish indicators, but that is now changing. A series of extremely high
put-call ratio readings on the standard ratio this week has pushed it
higher, and thus the standard ratio is now back on a sell signal.
Admittedly it is high on its chart and it will probably give another buy
signal fairly soon. But it is also in a state that we must consider as
extremely oversold -- a state which sometimes lead to severe market
declines before true buy signals arise. As we always say, "oversold does
not mean buy." The weighted ratio has suffered much the same fate, but
our computer projections have not officially downgraded it to a sell
signal as of this date.
Breadth continues to jump back and forth with every little market
whim. We can't totally give up on breadth as an
indicator, even though it is whimsical of late, because -- for example
the most recent decline (From the $SPX 1280 level) was really only
signaled by the breadth sell signals.
Finally, the volatility indices have put in place another spike peak
buy signal on their charts. After reaching a high above 19 earlier this
week, they fell to 16 or lower during the rally. That's enough of a
reversal to be considered a buy signal for the short term. From a longer-
term perspective, $VIX is now increasing in value, and that generally is
a negative for the market.
In summary, we don't feel particularly good about this market. Buy
signals are very short-term at best, and rallies don't hold. Until the put-
call ratios can get back on buy signals and until $SPX can overcome
some of the important resistance levels, we will continue to take a
bearish viewpoint.
