The market continues to rally, nearly every day. Declines are met with
buying -- most likely from shorts and under-invested institutions still
trying to catch up to this strong market. This strength really started on
the day of the London bombings, when the market sold off heavily
overnight and then recovered to finish up on the day. Perhaps that
intraday decline shook some weak hands out of the market and they are
still trying to get back in. For whatever reason -- increased confidence,
perhaps, that terrorism isn't a market sell signal -- the broad market
hasn't acted this well in a long time.
The major averages are not uniform in their advances, however.
The S&P 500 index ($SPX) continues to lead the big-caps, as it is at new
2005 highs and has been for over a week. $OEX, $DJX (the Dow), and
QQQQ are not at yearly highs, but they have overcome significant
resistance areas. At the true top end of the spectrum, though, are the
small-cap indices, for they are at or near all-time highs. This includes
Value Line ($VLE), Russell 2000 ($RUT), and the S&P Smallcap 600
($SML).
The equity-only put-call ratio charts are shown in Figs 2 & 3. All are on
buy signals now. First the weighted (Figure 3) and then the standard
(Figure 2) made new 2005 lows this week. That is bullish confirmation for
the broad market. Moreover, the symmetry of the standard chart is still
intact. Note the pattern of Buys and Sells this year. They form a sort of
head-and-shoulders pattern, and the next step in the sequence would be
for the average to plunge to near the bottom of the chart -- a move which
would surely be accompanied by higher prices in the stock market.
Market breadth has been strong, and has somehow -- almost
miraculously -- been able to work off the extremely overbought condition
without the market having taken a hit. The few down days or sideways
days seem to have alleviated some of the overbought conditions.
Finally, volatility indices ($VIX and $VXO) have continued to fall.
They dropped below the December, 1995, lows -- and are now at their
lowest levels since January-February, 1994. Any lower and they will be
at all-time lows. Many observers are issuing sell signals based on these
low $VIX levels, but they are missing the point. A low $VIX, in and of
itself, is not bearish. It's only significant when it begins to rise. At this
point, we'd not be concerned about $VIX unless it rose above 13, and
really, above 14. Furthermore, remember that a rising $VIX doesn't
have to be bearish for the market, as was shown many times in the
1990's. In reality, a rising $VIX is just a harbinger of more volatile
times. Those are not upon us yet.
In summary, we remain bullish, in line with our technical
indicators. There are no sell signals at this time. Even the overbought
conditions are not severe, although when a market travels this far in a
straight line (over 70 S&P points since the overnight low on the day of
the London bombing until today), there is always the chance of a sharp,
but short-lived correction.
