Thursday, January 6th, 2005
Stock Market
The wheels came off the apple cart this week. Selling -- which started merely as tax-oriented selling (traders taking gains in 2005 rather than 2004) -- ballooned into a full-fledged deluge through the first three days of the year. Furthermore, Thursday's rally wasn't anything to be really proud of, either. The first two days of selling were enough to turn most of our technical indicators negative, including the all- important gauge of seeing the major averages close below support and below 20-day moving averages.
$SPX and QQQQ had been the market leaders, with $OEX and $DJX (the Dow) lagging during the rally. However, all that has changed this week. $SPX and QQQ have been decimated, while $OEX and $DJX have actually more than held their own on a relative basis. From Figure 1 you can see that $SPX fell below its 20-day moving average (at 1200) and then below support in the 1190-1192 area. This broke the back of the uptrend. QQQQ performed in a similar fashion. However, $OEX toyed with its support level at 565, but did not close below it. That is a small piece of encouragement for bulls.
What this technical breakdown of prices indicates to me is that the market will not be able to merely bounce upward from this selling, as it did in November and December. Rather, it will have to do some real work to set up oversold conditions and actual buy signals. At least twice in the past couple of months, we have seen buyers step into the market after only a modest decline or even a couple of days of sideways action. Thus, the market never really got oversold; rather, if you wanted to buy on dips, you weren't accommodated because there weren't many. That has now changed. Buyers must be selective and wait for true buy signals.
Equity-only put-call ratios are both on sell signals now. The weighted ratio, of course, gave a sell signal (prematurely) several weeks ago. However, the standard ratio has been clinging to its buy signal. This week, however, it finally turned the corner -- after wavering sideways for a while -- and our computer projections confirm that this ratio has begun to rise and thus has generated a true sell signal. Figures 2 and 3 show these ratios. Market breadth was terrible this week, and fell deeply into oversold territory.
Volatility ($VIX) rose rather sharply for three days and then leveled off. $VIX actually started to rise before the selling began, thereby once again giving it credibility as a short-term indicator. It is still at very low levels, considering that it barely got above 14. Technically, an official $VIX sell signal, in our opinion, would occur when $VIX rose above 14.50 (see Figure 4) and $SPX broke down below support. The latter has occurred, but not the former.
In summary, most of the indicators are on sell signals. The only ones that escaped -- and not by much -- were $OEX holding above 565 and $VIX staying below 14.50. None of this means that the intermediate-term bullish targets we had outlined previously are negated. But we would not be long this market until these indicators improve dramatically.
