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McMillan Market Commentary 6/18/4


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#1 TTHQ Staff

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Posted 18 June 2004 - 09:59 AM

Stock Market


The market suffered a sharp, but so far short-lived, pullback last week.
It has now stabilized and now we must see if it can regain the uptrend
by exceeding last week's highs. We think it can.

The major indices -- while getting buffeted by a couple of sharp
down days -- have held the uptrend from the May bottom fairly well.
We would look for new relative highs to be a signal of accelerated
upside action. Specifically, that would mean $OEX above 557, $SPX
above 1142, and the Dow above 10,450. If those levels are surpassed,
then shorts (which are more numerous than one might think) would
have to think about covering, and the markets could assault the March
highs and most likely the yearly highs after that.

The equity-only put-call ratios are shown in Figures 2 & 3. They
remain on their recent buy signals. Last week's declines in the broad
stock market did not affect these charts, but that's not unusual since
they are 21-day moving averages. You can see that, not only are they
still on buy signals, but they are relatively high on their charts, so there
is room for them to fall further before getting "overbought."

Market breadth has been a problematic area. There have been
several days where breadth has been extremely negative or extremely
positive. This stems from a somewhat unusual phenomenon that has
been occurring: the market gaps open -- following news or, more
likely, overnight moves in Asian or European markets -- and then does
mostly nothing else for the rest of the day. This has the effect of
exacerbating the advance-decline ratios. We'd need to see some bearish
confirmation from another sector before acting on breadth sell signals.

Volatility indices have declined recently, as option implied
volatility dwindles. $VXO, the measure of $OEX implied volatility,
reached a new 8-year low recently. $VIX is not far behind. On the
one hand, this reeks of complacency, which isn't good. On the other
hand, a declining trend in volatility is bullish. So, as long as these
measures don't rise back above 17.50 or so, then we would continue
to interpret them as bullish. A rise above 17.50 would be three points
off the lows and that could signal a bearish turnaround in volatility. So
far, that hasn't happened.


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