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Sunday, June 05, 2005

Stock Market
In a market that is becoming ever duller as each day passes, the bulls remain in charge. Declines have been minor and there has been a steady plethora of advances over declines on most days. Consider the $SPX chart in Figure 1. It has now moved above 1200 for the first time since March. The other major indices also stand at their highest levels in nearly three months. There really isn't much resistance between these levels and the yearly highs (above 1220 for $SPX). These charts will retain a positive picture unless they violate the weekly lows -- about 1190 as far as $SPX is concerned.

The charts are not the only positive indicators, however. Equity- only put-call ratios have remained steadfastly bullish since rolling over to buy signals a few weeks ago. Figures 2 and 3 show the steep decline in these ratios. They are bullish as long as that line is declining. It is also worth noting that these ratios have plenty of room to move lower before they would be considered 'overbought.'

Market breadth has perhaps been the most impressive bullish indicator recently. On this past Tuesday -- the first day after a 3-day weekend -- the major averages suffered something of a setback, with the Dow losing 75 points, although $SPX only lost 7. While that was happening, NYSE breadth was actually positive -- a most unusual occurrence, although it was aided by a strong bond market (as you should know, there are many interest-rate sensitive issues listed on the NYSE -- issues that are not stocks). Perhaps just as impressive, though, was the fact that 'stocks only' breadth was only modestly negative that day. The next day saw a rather strong rally, as a Fed governor inferred that the Fed's interest rate increases might be coming to an end. Breadth was superlative, but is now overbought. It is bullish for breadth to be overbought while the market is making new relative highs, especially for the intermediate term (although these overbought conditions do make the market subject to sharp, but short-lived, corrections).

Finally, volatility ($VIX) has remained subdued and that is bullish as well. As long as $VIX stays below 14 (it is nearly down to 12 now), that should remain a positive influence for the market. Only if $VIX were to rise sharply for three or more days would we become concerned about what it is 'saying.'

Overall, then, we remain bullish. Those with profits in existing long positions might want to take some partial profits, just in case there is a short-lived correction, but intermediate-term traders can stay long unless actual sell signals arise from our indicators.

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