The most important guideline throughout this rally, which began last
October (or, arguably, last August) has been the trend line connecting
the bottoms (see chart, page 11). That trend line is still intact, and as
long as it is, we will retain a bullish bias towards this market. That's
the good news. Most of the rest is not nearly so optimistic. First, the
major indices broke out to the upside last Friday, only to fail once
again and fall back below those breakout areas when the market
suffered a major setback this past Wednesday. This sort of thing has
happened previously in this rally, though, and -- while disappointing
from a bullish perspective -- is not necessarily the death knell for the
bullish trend.
Equity-only put-call ratios have been on buy signals since late
January. But with the steep decline in the market this week, that has
changed. Even though the ratios have only recently turned upward,
our computer projections indicate that indeed these are sell signals (see
charts, above). This is not something to be taken lightly, as these
indicators don't give many signals.
Market breadth has been volatile during this rally. Most recently,
they gave sell signals. Admittedly, we give these indicators
less weight that then equity-only signals, for example, but it is still the
fact that both of our breadth oscillators are on sell signals now.
Finally, there is volatility ($VIX). $VIX hasn't been too "concerned"
about this decline. It has only moved up fractionally -- even during the big
down day on Wednesday -- and isn't displaying much worry at all. This is
somewhat bullish. The reason we say that, is that $VIX has been
pretty good in the last couple of months in its prognosis: it has refused
to rise much during declines, after which the bullish trend resumed.
So, the bulls have to hang their hat on the fact that the trend is
still up and $VIX isn't "worried." The bears can point to the new sell
signals from the put-call ratios and market breadth. If the trend line is
broken, I suspect $VIX will shoot upward at that point, and some
serious selling could take place. But, until then, the market could just
be trying to weaken the resolve of bulls -- scaring them out of the
market before the next phase of the rally takes place. We're staying
bullish as long as the trend line holds.
