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McMillan Market Commentary 6/4/4


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#1 TTHQ Staff

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Posted 04 June 2004 - 10:08 AM

Stock Market

One of the worst things about being bullish is that one suddenly finds himself allied with a lot of empty suits appearing on television. If those perma-bulls are overly optimistic, it always makes me nervous about my buy signals. However, it seems that most of the usual bulls on TV are now calling for a sideways market because 1) earnings aren't due out for a few weeks, 2) the price of oil is high, 3) there are continuing problems in Iraq, and 4) interest rates are going to rise. Frankly, their attitude makes me even more bullish. None of those reasons are valid, in my opinion. Oil, Iraq, and interest rates have already been factored into this market -- to a certain extent, at least. Furthermore, we've shown that earnings announcements and the performance of the stock market are not directly linked (in fact, one would say that's true for the long term as well as the short term). In any case, anything that gives the market a "wall of worry" to climb, is good because it reduces bullish sentiment. We can't be contrarily bullish if everyone else is bullish, too.

There hasn't been a lot of change in most of our indicators, save for put-call ratios. For example, prices of the major indices have held above support (1105 for $SPX, 537 for $OEX). As long as those levels aren't violated on the downside, we'd consider the charts to be bullish (Figure 1).

Both the standard and weighted equity-only put-call ratios gave buy signals in recent days (see charts, above). The weighted chart (above, center) is the most obvious in that it has dropped sharply from its recent peak a clear buy signal. The standard ratio (chart, above left) is declining more slowly, but our computer projections verify that this is, indeed, a peak on the chart and thus a buy signal as well. It is important to have these sentiment indicators in the bullish camp. Other important broad market put call ratios, such as $OEX, $NDX, QQQ, and the S&P 500 futures option rates -- all of the weighted variety -- are on buy signals as well.

Volatility indices ($VIX and $VXO) gave buy signals when they fell below 18 recently. They have remained subdued, although there has been a little rise in these indices in the last couple of days. A slight rise is fine, but if they were to rise above the 17.50 to 18.00 area, that would negate the current buy signals.

Finally, market breadth has remained quite bullish. It is not a problem that this indicator is overbought, for a new bull phase often displays overbought readings -- especially as far as breadth is concerned.

So, everything remains positive in general. We are looking for $OEX to advance to the 560 in short order.


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