McMillan

Option Strategist

Stock Market
Despite the positive seasonal period we are entering and the improving technical indicators, this market still has to prove itself with an upside breakout.

Looking at the chart of $SPX, which is representative of most of the broad market indices, we see that it has bounced back and forth between 1170 and 1205. A breakout from that range would be significant, in either direction. This most recent rally in the broad market -- the one fueled by the announcement of the new Fed Chairman nominee -- failed right near 1205 and very near the declining 20-day moving average as well. Thus, technically, the chart pattern of the major indices is neutral, as long as it's in this range. It is quite possible that the short-term seasonal bullish pattern will materialize into enough of a move to confirm an upside breakout, but it is not guaranteed, of course.

Equity-only put-call ratios moved strongly higher during the October decline, as traders loaded up on puts. This puts the ratios in "oversold" status, but they have not yet rolled over to confirmed buy signals. The weighted ratio (center chart, above) is slightly below its recent peak, but even though that might turn out to be a rollover point, our computer projections don't yet confirm it.

Market breadth has improved during the last couple of weeks. But the last two days' negative breadth has put a dent in that positive outlook.

Volatility ($VIX) has been, well, volatile. $VIX peaked at 17.50, fell to 13.50 and has bounced back and forth in between. The peak at 17.50 stands as a modestly bullish sign, but recent sideways action makes $VIX somewhat dubious as a short-term indicator at the current time.

In summary, we expect the short-term bullishness of the late October Seasonal Buy Pattern to hold once again this year. If it can force the market up above 1205, basis $SPX, that may be enough to trigger a more intermediate-term buy signal. We would act on that if it happens. However, it should be pointed out that nearly every bullish analyst has been counting on a 4th quarter rally to bail out the market. If that's too much conventional wisdom, it won't happen, of course.