Thursday, February 3rd, 2005
The January Seasonal Period served us well this year. The market rallied from 1174.55 to 1189.89 over the 5-day period. However, this year we learned from past travails and exited the position after the fourth day at $SPX 1193.19. Either way, it was a good gain for this seasonal pattern, and continues its profitable legacy.
But now what? In our view $SPX 1195 is at an inflexion point. If the market can exceed that level, on a closing basis, it ought to then be able to challenge the 2004 year-end highs at 1217 or higher. However, if $SPX can’t get through the 1195 level within the next day or two, it may indicate that the (former) bearish trend has reasserted itself. Hence we are watching this action with interest. $OEX faces a similar challenge at roughly the 570 level. as does Dow-Jones ($DJX) at 10,650 and QQQQ at 38.
Equity-only put-call ratios remain negative. As long as they continue to climb, they will be bearish. However, they are getting somewhat higher on their charts now enough so that one might consider them “oversold.” But we can’t anticipate a buy signal from these reliable intermediate-term indicators (that has proven to be unwise in the past). So, we’ll watch them, but for now they remain bearish.
Market breadth was very positive during the January seasonal rally, and thus both breadth oscillators moved into overbought territory. They remain there today, as Thursday was only mildly negative in terms of breadth. They will eventually give sell signals, when breadth deteriorates. From current levels, it would only take one day of heavily negative breadth to generate sell signals, but if the rally persists in the coming days, then it will be harder to generate the eventual sell signal.
Finally, volatility ($VIX) has dropped to near its recent (9-year) lows. Technically, as long as $VIX is declining, that’s bullish. However, this is clearly in overbought territory and thus any rise in $VIX from here could be the beginning of yet another sell signal. The last negative signal from $VIX was almost meaningless, as the January rally pushed it back down. So, the indicators are somewhat mixed, but we expect the market to move away from this inflection point strongly, and soon.
