Thursday, June 23rd, 2005
Stock Market
The old adage is "never sell a dull market." Well, this market is about as dull as it gets. I was recently struck by the similarities among many charts: a strong advance in May and then a flat, tight range in June. The charts of the major averages look a little better than that, though, as $SPX, $OEX, and $DJX (the Dow) have all made new highs in the last week. We still expect them to challenge the yearly highs as long as the current indicator readings hold up (near 1230, basis $SPX, for example).
Equity-only put-call ratios (Figures 2 and 3) have remained uniformly bullish, as they have continued to decline. They are getting lower on the charts, which means they aren't in the favorable positions they previously were, but that's to be expected after such a long period of advance (the actual start of this rally was back in April, although the put-call ratio buy signals were generated at the May bottom -- almost exactly a month ago). However, there is a new development, as the averages just began to curl upward. There are small circles on the charts that highlight this. Our computer projections are not saying that this slight curl upward is anything to worry about, and similar curls in the past few weeks have been meaningless. Still, we want to keep an eye on this because of the reliability of this sentiment indicator.
Market breadth has been excellent over the last month. As you know, we like to see the breadth get overbought and stay that way during the initial stages of a new bullish phase. That has happened. but at levels like that, the market is always going to be subject to sharp, but short-lived corrections. As dull as this market has been, though, "sharp" is a relative word, as any corrections have been rather slow-moving affairs that haven't had much follow-through. On many "correction" days, in fact, breadth has been just barely negative. Today is a typical example: with the market selling off on Crude Oil news this morning, advances and declines were about equal. Part of this positive action in breadth is attributable to the strong small-cap indices, such as the Value Line Index, which is now trading at an all-time high. Thus, the positive breadth has been coming from smaller companies.
Finally, there is volatility. As you know, it continues to decline. Yesterday (Tuesday), both $VIX and $VXO -- the implied volatility of $OEX options -- closed at their lowest levels since December, 1995. Moreover, $VXO and $VIX usually trade at about the same price, but currently $VXO is nearly a point lower. If $VIX were to drop by another point from here, it would be toying with the 10 level -- near the lows of all time. As long as $VIX remains subdued, the market can rally. Thus, it's not so much that a low $VIX is bullish, but that it isn't bearish. Our general rule of thumb is that if $VIX rises by 3 points from its lows, then one should view that as a potential sell signal. The closing low on $VIX so far is near 11, so as long as it remains below 14, the bullish trend of the market can persist.
In summary, we must remain bullish in line with our indicators. We could try to analyze things such as why the market is advancing when Crude Oil is perilously high, but as technicians we don't really have to answer questions such as those -- we merely need to observe what prices and our indicators are "saying," and act accordingly. At the current time, that means we remain bullish in the absence of any sell signals.
