Thursday, August 18th, 2005
Stock Market
We are still taking a negative view of this stock market, although the
bears certainly haven't seized their opportunity. The major averages
made new relative lows this week and have been unable to recover much
from there. In terms of $SPX, this is the 1222 level. This level was
penetrated on the downside on Tuesday, and while the market has tried
to probe back above there, it has been unable to close back above that
level. The other major indices -- $OEX, $DJX (the Dow), and QQQQ --
all have similar chart patterns. Moreover, these indices have developed
a downtrend on their charts -- lower highs and lower lows. As long as
that pattern exists, they will have a bearish slant.
The equity-only put-call ratios remain on the sell signals that they
first generated near the beginning of August. These sell signals have
remained consistently in place since that time -- the only one of our
indicators of which that can be said. Even on days when the market has
rallied (and there have been several), these ratios have not budged. As
long as they continue to increase (see Figures 2 and 3), they are bearish
for the broad market.
Market breadth (advances minus declines) has slowly been
deteriorating. This has been masked on some days by the actions of the
broad market. For example, today the major averages were generally
unchanged, but underlying that was the fact that decliners led advancers
by over 700 issues on the NYSE. At the current time, both of our
breadth oscillators are in negative territory -- but not far enough to be
considered oversold. Another day or two of declining market might be
enough to push these into oversold territory, but even that would not be
a buy signal. So, breadth is negative right now.
Finally, the volatility index ($VIX) has mirrored the $SPX Index.
As $SPX broke down earlier in the week, $VIX broke upward
confirming a bearish outlook. That breakout took $VIX above the 13.30
high that it had made earlier this month. Although $VIX has probed up
towards 14 several times this week, it continues to close just above 13.30
(similar to $SPX closing just below its important 1222) level. $VIX is
trending higher, which is bearish (see Figure 4).
In summary, the indicators are negative and so we are bearish.
However, it should be pointed out that with both $SPX and $VIX
penetrating important levels, the market really has held together fairly
well. That's why we said earlier that the bears haven't really taken
advantage of this opportunity. Even so, it's hard to imagine our
indicators taking on a bullish tone unless there is more downside
damage, for nothing is really oversold at this time.
