The upside breakout finally arrived (on Wednesday). The major indices were able to overcome the resistance area that had been inhibiting all rallies for the past couple of weeks. In terms of $SPX, this was 1165 (555 for $OEX). This has turned the near-term picture bullish, as it is the last piece (well, not quite -- read on) in the puzzle. As we've been saying for some time, it is the charts of the major averages that have been the most bearish indicator. Most of our other indicators had already given, or were closing to giving, buy signals. With the major indices ascending above this resistance, the question now becomes, "How high can they go?" We would expect them to at least reach the 50-day moving average, which should provide another tough test. A close above there would turn the whole picture much more bullish. We are going to take a "wait and see" attitude on that breakout, though, for it is not at all clear that the indices will in fact be able to overcome the downward sloping 50-day moving average.
Equity-only put-call ratios have not improved as much as we would have expected, given the market's upside breakout. In fact, the weighted ratio remains on a sell signal (Figure 3), while the standard ratio is trying to generate a buy signal -- but hasn't been convincing to date (Figure 2). In Figure 2 you can see that the average has moved sideways for a week or so, but it is not clearly trending downward yet, and that downward trend is what's required for a buy signal. Meanwhile, kin Figure 3, the weighted ratio is still making new highs, and that's bearish. This non-confirmation from these important indicators is what's mainly giving us pause about the strength of the upside breakout.
The other indicators are much more bullish. Breadth was very strong on the rallies, and the breadth oscillators have given buy signals and bullish divergences for some time now. Most recently, these oscillators turned bullish last Friday and/or Monday. Furthermore, $SPX made two (relatively equal) bottoms, but the breadth oscillators were at higher readings on the second, which is a bullish divergence. None of this is particularly new, as breadth has given a couple of (false) buy signals previously.
Volatility ($VIX) also turned bullish some time ago -- after peaking above 18 (Figure 4). It fell below 14 recently, and has remained in that neighborhood. We don't expect to see $VIX collapse back to 11 -- there's just too much actual volatility in this market for that right now. Regardless, $VIX remains in a bullish mode unless a new uptrend is evident on its chart.
The bottom line is that the recent breakout was bullish. Shorts should have been covered. Whether one wants to go long is a more vexing question. We prefer to wait for the second level of confirmation -- if it comes: a close above the 50-day moving average before turning aggressively bullish. Conversely, a close back below the support levels (1165 on $SPX) would be bearish, for it would negate the breakouts -- much like the false breakout on the upside that occurred in early March.
