Thursday, July 27th, 2006
Stock Market
There is enough action on both sides of this market to justify either a
bearish or bullish case. The big rally that occurred this week broke
through the first $SPX resistance area at 1260, and that was positive.
However, the real resistance on $SPX is at 1280 and 1290 -- the tops of
the previous rallies. If the market could punch through there, it would
be quite positive, but we don't think it can.
Equity-only put-call ratios have somewhat surprisingly thrown a
damper on our set of technical indicators. First the standard ratio gave
a sell signal, and now the weighted ratio has just recently followed suit.
Admittedly, they are at rather high levels on their charts (Figures 2 and
3), so perhaps another buy signal is not far off. But, for now, they have
turned bearish. Since they are such good intermediate-term indicators,
we have to respect them. While we're on this subject, NASD stocks
have been in such a sorry state that they never gave the buy signals that
the other equity-only ratios did (in mid-June). Now, all the others have
rejoined the NASD ratio on a sell.
Market breadth (advances minus declines) continues its
schizophrenic activity. It ranges from wildly bullish to wildly bearish on
back-to-back days. What causes this is the uniformity of institutional
activity during a single trading day. They all come in to either buy or
sell and demand fills by the end of the day. Then, the next day is a
completely new story, with new rumors or news, and a whole other set of lemming-
like institutional trading activity. As a result, breadth continues to be a
weak indicator.
Volatility indices ($VIX and $VXO) are on buy signals as well.
They peaked a couple of weeks ago and have generally been trending
lower ever since. A down-trending $VIX is bullish.
So, we have somewhat mixed indicators, with $SPX, $DJX, and
$OEX bumping up against heavy overhead resistance -- including their
100-day moving averages, which managed to stem every rally so far
(QQQQ is in far worse shape than these other indices). While we allow
for the possibility of a rally towards $SPX 1280-1290, we expect that
resistance to hold and lower prices to be seen soon.
