McMillan on the Market

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Stock Market
Nearly all of our indicators gave sell signals last week, but the market's rally this week has negated some of them. Still, we feel that a much more negative tone is apparent and a bearish stance can be adopted -- at
least for the short term.

The major averages broke down below first support levels last week, but more major support levels have not been tested (yet). For $SPX, this means that it fell below the 1228-1230 support level, bouncing at 1222, but did not test the major support at 1210. The subsequent rally this week failed near the highs once again, so there is now a double or triple top in the 1243-1245 area. A close above there would be bullish and would cancel all the sell signals, but as long as that resistance holds, it has negative implications.

The equity-only put-call ratios rolled over to sell signals. In this case, that means they turned up and began to rise (see Figures 2 & 3). At first -- or perhaps even today -- this rollover wasn't obvious to the naked eye, but we use computer projections to verify these signals, and those projections "saw" the rollover in its initial stages. You can see that the weighted ratio had dropped to nearly the bottom of the chart (about the same level as last December's sell signal), which means it was in overbought territory when this sell signal was given. While we don't use absolute levels as buy or sell points, it is useful to note whether the signals are coming from the extremes of the chart -- as this one is -- for those are usually the best signals.

Market breadth has bounced back and forth as the market first declined last week and then rallied this week. We'd rate breadth as "neutral" at this time.

Finally, volatility ($VIX) has been interesting as well. The increase in $VIX last week was the harbinger of the selling that took place. $VIX shot up above 13 and closed there -- ostensibly a sell signal. However, just as sharply, $VIX retreated this week, dropping all the way to 11.50 before rebounding back above 12 again. The net of this action is that $VIX is in a trading range now; if it closes above 13.40, that would be bearish, and if it closes below 11.50, that would be bullish. Otherwise, if it remains in between, $VIX would be neutral.

In summary, the most negative indicator is the equity-only put-call ratio, while the others are mostly neutral. But that's an important indicator which has -- at other times in the past -- been the primary indicator of a market move. As a result, we are taking a negative stance unless $SPX can break out to new highs, or unless buy signals are generated by some of these indicators (unlikely).

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