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McMillan Market Commentary 6/11/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 11 June 2004 - 09:26 AM

Stock Market

The bullish case was proceeding quite nicely until it ran into a fairly
steep profit-taking decline on Wednesday. Prior to that, many of our
technical indicators were overbought -- as we pointed out as long as a
week ago. However, the market continued to advance in the face of
those overbought conditions until, suddenly, everyone seemed to want
to sell at once. At this point in time, the decline looks like nothing
more than the "normal" sharp, but short-lived selloff that arises from
an overbought condition. However, we will keep a close eye on our
technical indicators for the purpose of ensuring that the bullish case is,
indeed, intact.

Prices of the major indices had advanced quite strongly early in
the week and only pulled back modestly during the decline. They are
above all of their short-term moving averages and above support, so
we'd still rate them as bullish. We continue to look for $SPX, $OEX,
and $DJX to challenge their April highs, at a minimum.

Equity-only put-call ratios have remained steadfastly bullish.
The weighted ratio has been declining for nearly two weeks (a
declining put-call ratio is bullish). The standard ratio took a little
longer to confirm a final buy signal (see Figure 2), but it has done so
also. As long as these ratios continue to decline, they will be positive
for the broad market.

Market breadth (advances minus declines) has been the biggest
problem. This is the only one of our
indicators to actually be on a sell signal at the current time. Even so, we
would only view this sell signal as a reason to take partial profits
(and perhaps to roll long June options to July) rather than a reason to
turn outright bearish.

Finally, volatility indices ($VIX and $VXO) are trading near their
yearly lows once again, especially $VXO (which measures the implied
volatility of $OEX options), as it is below 14. Certainly, the recent
decline did not engender any fear in the option markets. This is
bullish. Some might say that $VIX is "too low," but until it starts to
rise, it cannot be considered bearish. At this point, we would continue
to say that it would take a rise above 18 by $VIX for us to consider this
indicator to have turned bearish.

So, the market got overbought and is suffering the short-term
consequences of that. But the bigger picture is that we are still bullish
and will remain so unless a preponderance of our indicators turn
bearish.


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