The Option Strategist Weekly Updater

February 10, 2006

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The market actually made its high for this year just a few days into the year. If you weren't looking at a chart, you might not believe that, for the bullish media and brokerage barrage has been heavy. But, with this week's $SPX close below 1260, that put the final cap on a series of negative technical developments, and we are therefore officially bearish now.

When $SPX closed below 1260, that made a lower low to go along with a lower high -- establishing a negative, down-trending channel (see Figure 1). While the market did bounce right back after that, the bounce is still within the confines of that down-trending channel. In other works, with the market being more volatile recently, it is possible that we will see these bullish bounces off of support (1260, 1245-1250) and off of the bottom of the channel. However, as long as the channel remains intact, the trend is down.

The equity-only put-call ratios rolled over to well-defined sell signals this week. This is a big part of our strong bearish opinion. While they had toyed with sell signals recently, they did not confirm them. However, this time they have. As you can see from the charts in Figures 2 and 3, there is no doubt that they have turned higher. A rising equity- only put-call ratio is negative for the broad market. Also note that the NYSE/NASD chart has both ratios presently on sell signals as well.

Market breadth has not been great for a couple of months, and the last two weeks fit right into that bearish pattern.

Finally, volatility indices ($VIX and $VXO) are in uptrends that began back in December. Despite some gyrating (the spike peak and subsequent drop in January), the uptrend ploddingly persists (see Figure 4). A rising $VIX is bearish -- at least in this environment -- and so this completes a full complement of negative technical indicators.

Could we be wrong? Of course, but when all the indicators are in agreement like this, we feel comfortable taking a stance (a bearish one, in this case). As we wrote in The Daily Strategist yesterday, if you can't agree with your own indicators, then what good are you/they? Obviously, if these trends -- downward in $SPX and upward in $VIX are violated, that would be our 'stop out' point.