The stock market continued to rise this week, without a lot of help from
technical indicators. But we always say that price action is the best
technical indicator, so it must be respected. $SPX managed to close
above resistance at 1280. There is still some resistance, at the 1290 May
top. If it should exceed that, the chart formation would be a rather
bullish one, and we would then look for higher prices. However, since
the entire 1280-1290 range must be considered a resistance area, we are
not looking to get long at this time.
Equity-only put-call ratios remain on sell signals. It is unusual to
see them continue to rise as the market itself is rising. When this
happens (both the put-call ratio and the underlying price rising in
conjunction), it usually means that the put-call ratio signal is unreliable
that there is considerable hedging activity which is distorting the put-
call data. In this case, however, we are talking about ALL stock options
that trade, so there would have to be a LOT of hedging activity to distort
the ratio. Perhaps there is, because put volume has been heavy for
several weeks even though the market has generally been rising.
Market breadth (advances minus declines) is positive. Actually, it
follows the daily moves with extreme daily readings of its own, because
of rather uniform institutional activity.
Finally, volatility indices ($VIX and $VXO) have remained rather
subdued for the most part. Their continued downtrend over the last few
weeks means that they remain on buy signals.
So, in summary, we see buy signals from $VIX and breadth, but the
put-call ratios are negative (although there may be hedging distortion
there). Finally, $SPX itself is modestly bullish, and a close above 1290
would be a much more bullish sign.
Potential news items may be complicating things: 1) the
unemployment report on Friday is sure to appear bullish to some traders
and bearish to others (it's the classic case of "bad news is good news" if
job growth is sluggish), and 2) many traders are become more and more
certain that the Fed will not raise rates at next week's FOMC meeting.
If they are right, this might be a classic case of "buy the rumor, sell the
news." That is, the market might actually decline right after that meeting
if a "pause" is announced. Of course, if rates are raised, that would be
even more negative. Consequently, even if $SPX breaks out over 1290,
some amount of caution should be used.
