Early this week, $SPX closed at a new relative low, and many of the indicators appeared to be turning bearish (for example, $VIX closed above 14). However, prices have rallied since then, and $SPX made a marginal new all-time high today -- both intraday and closing. Is this probe upwards more effective than the probe downwards was a few days ago? It's hard to say, but a further close at new highs would solidify an upside breakout.
Recently the historical (also called actual or statistical) volatility of many of the major indices and their derivatives reached extremely low levels. For example, the 10-day historical volatility of $SPX dropped to 3.7%! In this article, we’ll examine how often this has occurred in the past and what it has meant for the broad stock market going forward from that low volatility reading.
The Standard & Poors 500 Index ($SPX) has made repeated new all- time highs -- both intraday and closing -- over the past three weeks. This action has, of course, resulted in a "bullish" $SPX chart.
The bears have made several attempts to sell the market intraday, but each time it seems to quickly regain strength especially late in the day.
Equity-only put-call ratios have remained bullish, AS well.
The bullish news is that $SPX has made a new all-time intraday high for the last three days in a row. The not-so-bullish news is that $SPX has failed to close at a new all-time on any of those days. This is the action of a tired market.
The $SPX chart (Figure 1) remains bullish unless $SPX closes below 1985 -- the upper horizontal line.
Equity-only put-call ratios remain on buy signals, however, despite the recent action.
$SPX broke out to new all-time intraday and closing highs this week. New all-time closing highs were made on 4 of 5 consecutive days, which confirmed the move, so the $SPX chart is bullish once again.
Equity-only put-call ratios have finally rolled over to buy signals. To the naked eye, they rolled over more than a week ago, but to the computer, the confirmed buy signals only arrived a couple of days ago.
The rally that began on August 8th has extended quickly and strongly to take $SPX to new intraday and closing all-time highs. When it crossed over resistance at 1960, the $SPX chart improved from "bearish" to "neutral." If another all-time closing high is registered today, that will officially make the $SPX chart "bullish."
After an ugly day on Thursday, August 7th, followed by a further decline of 13 $SPX points during the overnight session, stocks have rallied steadily. Most observers are saying that the correction is over and that the bulls are back in charge. That may be true, but the evidence is not completely in favor of the bulls, yet.
The $SPX chart remains bearish after having broken down through 1950. $SPX sliced right through the next support level at 1925, and after temporarily holding at 1915, appears ready to test the major support level at 1900.
Equity-only put-call ratios remain on sell signals (see Figures 2 & 3). They are both rising steadily, and as long as they are trending higher, that is negative for stocks.
I want to spend just a moment pointing out how these market tops can unfold. One good example was in 2007. The market had just made new all-time highs in July and everything seemed wonderful. Volatility had been low (except for one hiccup back in February, 2007), but no one seemed worried. Then, $SPX broke down sharply with a 30-point down day (yesterday was a 40-point down day for $SPX), and that unleashed the bears.
The genie is now out of the bottle, and it's going to be very hard to put him back in again. $SPX has broken major support at 1950, and that changes things: the chart of $SPX is no longer bullish; it is now bearish.
Equity-only put-call charts continue to remain on sell signals. These put-call ratios will remain bearish until they roll over and begin to trend downwards. It doesn't appear that will happen anytime soon.
