Stock Market

McMillan

The breakout by $SPX above 1205 and also above 1210 has turned the charts of the major indices bullish. They should stay that way unless they fall back below 1195 again. While there is still considerable overhead resistance, it appears that the current bullish environment is strong enough that a test of the summer's highs could be in order.

Breadth (advances minus declines) has been very strong. That is good, because it not only generates a buy signal from this indicator, but it means the participation in the rally is strong (i.e., a lot of small stocks are trading up). In fact, one might say that breadth has been so strong as to generate an overbought condition already. That could be true, but it is welcome, for any budding bullish market needs to generate overbought conditions early on -- it is an indication of strength in this case.

Volatility ($VIX) finally got its act together, too, and has now confirmed the bullish posture of the index charts and market breadth. $VIX dropped to a new relative low this week -- even gapping down on Thursday. $VXO -- the implied volatility of $OEX options -- is even lower than $VIX. As long as these continue to trend downward (in fact, as long as they don't begin to trend upward), this is a bullish sign for stocks.

The only one of our technical indicators that hasn't joined the party is the equity-only put-call ratio. Both the standard and the weighted ratios have recently raced to very high (i.e., oversold) positions indicating that traders were buying a lot of puts. Since these are contrary indicators, that is a good setup for a buy signal. However, that buy
signal has not yet occurred. There is a little 'hook' on the charts now, which likely will grow into a buy signal if this rally persists for another day or two. But, at this time, the equity-only put-call ratios have not yet signaled 'buy.'

In summary, we are on an intermediate-term buy signal -- much as we've seen in other Novembers. This one is coming off a good technical base, which makes it much better than the post-Katrina rally we saw in September. It's interesting to note that there seems to be a lot of bullish consensus in the media, but we can't trade that -- we can only observe the sentiment indicators we have on hand, and the extremely high levels of the put-call ratios would indicate that traders might have been saying they were bullish for November, but weren't actually trading that way.