Negative Market Signals Are Building Up

By Lawrence G. McMillan

Wednesday was an ugly day for the market, and it didn’t have the convenient excuses that Monday did.  It was just plain old selling.  There was a modest rally at the end of the day that lifted prices off of their worst levels.  Overnight, S&P futures are little changed in Globex trading. $SPX continues to hold above the 1540 support level (Wednesday’s low was just below 1544).  That is the only positive indicator for the bulls right now.

Equity-only put-call ratios continue to remain on sell signals.  Put volume is very heavy, and the ratios are racing higher.  This includes the total put-call ratio, whose 21-day moving average is (well) above 0.90.  This will eventually result in a buy signal, but for right now, it’s merely oversold, and the market can decline substantially during an oversold condition.

Market breadth was poor again, and Wednesday was another “90% down volume day.”  That makes two “90% days” this week, which triggers another sell signal (the one where we track the number of “90% days” in the last 50 trading days; when that falls to zero – as it did recently – and then climbs back to 2 or higher, a sell signal is generated).  This is just another way of saying that volatility has increased.

Speaking of volatility, $VIX blasted higher on Wednesday, taking out Monday’s high. That move cancelled the spike peak reversal $VIX buy signal from Tuesday.  At this point, we can’t say for certain that $VIX is in an uptrend, but it’s beginning to look that way – and that would be another negative for stocks.  Conversely, if $VIX drops back below 14.90 in short order, then another spike peak buy signal would be generated.

The construct of the $VIX futures has flattened considerably.  The front-month May futures (April expired yesterday) are the only futures trading at a discount, though, and the term structure still slopes upward, albeit not as steeply as before.  Thus, this construct still remains modestly bullish.

In summary, the negative signals are building up, but we still need to see $SPX break below 1540 in order for the price chart to confirm the negative technical indicators.

This market comment was taken from this morning's edition of The Daily Strategist Newsletter.