Weekly Stock Market Commentary 12/13/13

By Lawrence G. McMillan

The market -- as measured by the S&P 500 Index ($SPX) -- has declined on eight of the last ten days, and that has taken a toll on the technical indicators. However, $SPX is sitting right on support at or just below 1780 (see Figure 1). Hence, shorting the market now could be a mistake.

Equity-only put-call ratios have been meandering at very low (i.e., extremely overbought) levels on their charts for a couple of weeks. Within the last two days, they have started to rise, and they are now both on sell signals.

Market breadth has continued to be relative weak. Both of the breadth indicators that we watch are on sell signals, but are already in oversold territory.

Volatility indices ($VIX and $VXO) remained low for quite a long while, and $SPX was able to rally while they did. But then $VIX broke out over 14 last week, pulled back briefly, and has now advanced to 15.54 as of today. This an upside breakout for $VIX, and that is bearish for stocks.

In summary, if the market breaks down, it could make a sharp, but short-lived plunge lower, but we expect a rall by year-end.

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