Both the bulls and the bears have had their opportunities in the past week or two to push the market their way. Neither has succeeded. First it was the bulls' turn. Most of the technical indicators became bullish or at least were headed that way, and the major indices pulled back to a support area. It was an opportune time for a good rally off of support. Instead, the market collapsed through that support when Fed Chairman Greenspan spoke this week. Then it was the bears' turn. With the breakdown of support, the next stop would be the March lows. But selling dried up rather quickly the next day, and now the market has rallied back above the support levels again. This trendless action is not worthy of investing in new index option positions. Yes, there have been a few good intraday moves -- in both directions -- but nothing with follow-through.
The Dow, $SPX, and $OEX all violated their major support areas on the day of the Greenspan testimony (see Figure 1). Small cap indices fared better, as $RUT held above its support. It seems as if this support area has become a magnet of sorts, but surely the market can't stay near there for long. In a broader sense, though, a longer-term chart shows that we are in a trading range between the January highs and the March lows. While it may seem difficult to do at the time, selling near the top of that range, and buying near the bottom of that range, is the preferred strategy until proven otherwise. Perhaps we could even add a corollary: that when the market stalls in the center of the range -- as it has recently -- it will then make a fairly quick move to the edge of the range.
Equity-only put-call ratios remain on their recent buy signals, and they were undisturbed by the negative market action in the past week. Both the standard and weighted ratios (Figures 2 and 3) gave buy signals after the actual March bottom, but if this market eventually goes much higher, no one will be too concerned that their signals arrived a little bit late. Other major put-call ratios remain on buy signals as well: QQQ weighted, $OEX weighted, and the S&P 500 futures options standard and weighted ratios. NYSE breadth figures are very oversold, even though we know they are overly affected by the interest-rate-related issues on the NYSE that have been struggling.
Volatility has literally been collapsing (Figure 4). Both $VIX and $VXO are down to nearly 14 again. They began heading downward, even when the market was struggling. That is very strange action (usually, $VIX will rise when the market is falling). Essentially, option traders are expecting this market to remain docile, and they are getting quite complacent about it. We all know that such a low volatility reading eventually leads to a market explosion. Will it be on the upside or the downside? That we don't know, but it certainly doesn't appear to be a time to be selling options naked, and perhaps not even in spreads.
The bottom line is the majority of the technical indicators are bullish -- and have been for more than a week. But, until today (Thursday), the market has not responded in kind.
