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Home » Blog » 2012 » 05 » More bad news out of Europe halts oversold rally
By Lawrence G. McMillan

As often happens on the first day of trading after a three-day weekend, the market is buffeted by cross-current, so there are several moves.  Initially, the market was strong yesterday, topping out almost exactly at $SPX 1335.  Then selling drove the index down about 16 points, before a late rally took it back to near the highs.  Even though intraday volatility increased, actual (realized) volatility has not.  Tonight, S&P futures were down about 14 points after more negative news out of Europe.  An hour or so ago, there was one breath of positive news from Europe, and the S&P futures rallied about 12 points in a flash.  They have since given most of that rally back, though, and now trading down 12 points from yesterday's close.

The equity-only put-call ratios continue to rise strongly and thus remain on sell signals.  The weighted ratio is now at a higher level that it has been since the bottom last September (2011).  Thus, these ratios are definitely in oversold territory.

Market breadth was strongly positive yesterday (although it wasn't a "90% up day"), and so both breadth oscillators have now rolled over to buy signals.  These are the first indicators to actually register buy signals out of their previously oversold conditions.  Of course, if the S&P futures don't improve during the day today, these buy signals could be canceled out.

Volatility indices ($VIX and $VXO) were down fractionally yesterday, which wasn't exactly a resounding confirmation of the rally that took place in the stock market. $VIX closed just above 21, so it technically remains in bearish mode. $VIX futures are up a dollar in early trading, indicating that $VIX will be up slightly more than that.  A $VIX close below 21 would add some bullish impetus to stocks.

The $VIX futures dropped sharply yesterday – more than $VIX did in the front end.  But that process will likely be reversed to a great extend on today's opening.  Even so, the construct remains positive in that the $VIX futures continue to trade with a decent-sized premium, and the term structure continues to slope upwards.

In summary, the market seemed to be making good progress towards fulfilling the targets of the oversold rally (1340-1360), but will now be set back by yet more bad news out of Europe.  One really has to wonder how long this same process will continue to play out, but so far it shows no signs of abating.  

This market commentary was taken from last night's The Daily Strategist Newsletter.

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