The market has looked a little tired this week, as two good rallies on
Tuesday and Wednesday fizzled out. That tired appearance could be
mostly due to the fact that the market had gotten somewhat overbought
and needed to work that condition off. Often, an overbought condition
in an otherwise bullish environment (which we still believe this is)
produces a sharp, but short-lived, setback. But, at other times, it
produces a slower, grinding movement that allows the overbought
condition to abate. The latter could be the case now.
The major indices are still above support. For $SPX, those support
areas are 1190 and then 1185. That's the good news. It's somewhat
disappointing, though, that they were unable to hold the advance above
1200 especially in light of Tuesday's rally. At this point, we still think
the yearly highs can be challenged.
Equity-only put-call ratios have remained bullish since they rolled
over to buy signals about 3 weeks ago. Their charts are in Figures 2 and 3.
You can see that the put-call ratios are still declining strongly, and that's
bullish. The ratios have remained fairly strong even on down days
with the exception of yesterday (Wednesday). However, one day does
not affect these 21-day moving averages all that much, so they continue
to be positive.
Market breadth was especially broad during the market's recent
rise. This is good -- and to be expected -- during the early stages of a new
bullish leg in the market. The overbought conditions that are produced
do subject the market to corrections -- usually of the sharp, but short-
lived type. However, they can also abate from slow, sideways-to-down
movement, which is what has happened over the past few days.
Finally, volatility ($VIX) is low -- as has been mentioned elsewhere
several times in this letter. While the actual buy signal in $VIX occurred
back in April, when it peaked near 18, the fact that $VIX remains at low
levels is at least a "bullish continuation." Generally, we define a sell
signal in $VIX as being when it rises at least 3 points above its recent
lows. In this case, the recent low in $VIX is 11.80, so as long as it
remains below 14.80, it won't be considered bearish. A more flexible
viewpoint might hold that $VIX remains bullish unless it starts to climb
more sharply on down days -- and puts together, say, three rising days in
a row.
So, while the market hasn't fulfilled the wishes of the bulls, it is
still in a positive mode -- and will remain there until support levels are
broken and/or more sell signals are generated by the various technical
indicators.
