Larry McMillan on the London Attack's Market Impact

Gmail - THE OPTION STRATEGIST Weekly Updater 7/8/05:

Stock Market

The terrorist attacks and the market action in its wake have made the task of interpreting the technical indicators more difficult this week. It may take a couple of more days before the market is back into a "normal" rhythm -- if there is such a thing. But one thing stands out: the U. S. markets' reaction was extremely positive, as nearly every major indicator had a positive intraday reversal, finishing near the best levels of the day.

Start with the major indices. The S&P 500 Index ($SPX) began to collapse about 4am Eastern time on Thursday. Within a couple of hours, it was down 31 points -- a monstrous decline -- as there was much uncertainty involving the scope and style (biological?) of the attack. But, as bad as the attack was, there was relief that it wasn't worse, and the markets began to recover. In a stunning reversal, $SPX actually closed up on the day -- something I'm not certain it would have done if there had not been an attack, for it was looking rather weak on Wednesday. The intraday chart is included as figure 1 this week.

On its daily chart, $SPX has still not closed below 1190, and we are continuing to look at that level as crucial, closing support. We would not turn bearish on the market unless $SPX closed below 1190. As for getting more aggressively bullish, we still want to see $OEX and $DJX (the Dow) close above their respective resistance levels at 565 and 10,400, respectively.

Of a more bearish nature, the equity-only put-call charts are still rising and thus are still on sell signals. The standard chart (Figure 2) is not rising so smoothly, though, and it is conceivable that it could reverse back to a bullish status (i.e., back to a declining line on the chart) without a whole lot of trouble. The weighted chart, however, is more uniform in its upward progress and thus remains quite bearish (Figure 3).

Market breadth (advances minus declines) has been reasonably strong, but not excellent. On most down days, declines have not swamped advances. Even on July 7th (the day of the attacks in London), breadth wasn't terrible during the heaviest selling of the morning hours. By day's end, it had turned positive -- something that is not often accomplished on an upside reversal day such as that. We rate the breadth statistics as "neutral" for now.

Finally, volatility ($VIX) had a very bullish day. On July 7th, it almost rose to 14, but then closed much lower -- on its low for the day. That is a complete intraday (bullish) reversal. We have been saying that we wouldn't view $VIX as negative unless it closed above 14. That statement is doubly true now, with the intraday high that was made
today.

In summary, put-call ratios are negative, $SPX is positive, and $VIX is somewhat positive. For the bullish case to be "made," bullish confirmation is needed from $OEX and $DJX (closing above resistance) and from market breadth expanding if they do. On the other hand, negative confirmation would instead involve $SPX closing below 1190 and $VIX closing above 14. Until one or the other happens, we don't have a strong broad market opinion.

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