Weekly Commentary 11/2/12

By Lawrence G. McMillan

Ever since the stock market, as measured by the Standard & Poors 500 Index ($SPX) broke down through support late last month (on October 23rd), the bulls have been struggling to regain control.  They have not done so -- yet.  However, yesterday's rally has brought $SPX right back up to the 1430 level, and we are still in the October bullish seasonal period for one more day.

Equity-only put-call ratios gave sell signals about a month ago. That is, the trend of the ratios is now rising, and as long as that continues, it's bearish for stocks.

Volatility indices ($VIX and $VXO) had held out in the bullish camp for quite some time, but they too took on a more bearish slant when SPX broke down on October 23rd and $VIX rose to nearly the 19 level.  A rising trend in $VIX is bearish for stocks.  But as of yesterday, $VIX has fallen back below 17, and that is a much more bullish state for stocks.

In summary, it appears that $SPX will soon break out from this fairly tight trading range that it's been in: 1400-1430.  A breakout above 1430, accompanied by a $VIX below 17 would be bullish and should engender enough follow-through to test the September highs. But if, instead, SPX breaks down below 1395, and $VIX closes above 19, that would signal the onset of an intermediate-term bearish move in the broad stock market.

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