Stock Market -- Larry McMillan

Any thoughts that the bears might have been harboring about the effectiveness of this bullish market should be dashed by now. All of the major indices have either made new yearly highs or have broken out over major resistance. While there are some overbought conditions appearing, that is more or less normal for a new bullish phase, and we would recommend retaining this bullish outlook until actual sell signals occur -- not just overbought conditions.


$SPX is the leading index, and it has made new highs for the year. There is now support at various levels between 1045 and 1060. $OEX has not been as good a performer (too heavily weighted in MRK), but it too has performed well (figure 1). A clear-cut close above 560 would likely indicate that the index is ready to test its yearly highs in the 575 neighborhood. Meanwhile, QQQ and $NDX are already well on their way to challenging their own yearly highs (roughly 39 for QQQ and 1560 for $NDX).

The equity-only put-call ratios continue to be the most bullish indicators (figures 2 and 3). They are dropping rapidly, which is bullish. Moreover, neither one has reached the lower regions of its chart, where it might be considered "overbought." Hence these indicators will remain positive until they turn over and begin to rise something that is not likely at the current time.

Breadth has been strong all throughout this move that began just three weeks ago. As a result, breadth oscillators is deeply into overbought territory. That is not really a problem, though, as it is typical behavior for a new bull market.

Finally, volatility indices ($VIX and $VXO) are plunging towards new 8-year lows. The volatility "bulge" that had existed prior to the election is but a distant memory now. Low volatility readings are two-edged: one on hand, the market can be considered bullish as
long as $VIX is falling, but on the other hand, when $VIX is "too low," a market explosion lies on the horizon -- and since 2000, these explosions have tended to be on the downside (and at many other times in the past).

In summary, all indicators are on buy signals. Only $VIX and breadth are overbought, and that is not a major concern. It's unclear how far this market can run, but short-covering and "under-ownership" by mutual funds are major fuels for the bullish market now. What had
initially looked like it might be just a short-term move to the top of the trading range has now become a full-blown intermediate bull market and could easily carry into early next year (albeit I doubt at the current pace).


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