By Lawrence G. McMillan
Stocks rallied very strongly this week, and the gains that have been registered since Christmas have been spectacular. This has caused most fundamental investors, and especially the headline- chasers, to become very bullish. Do not be lulled into their euphoria.
The $SPX chart is clearly still in a downtrend. Its trend lines are heading lower. More importantly, it is still in a series of lower highs and lower lows, all occurring beneath a declining 200-day Moving Average. That is literally our definition of a bear market. Thus, this chart is telling you that a bear market still exists. $SPX has support at 2350 (the December lows) and has now risen all the way to the first resistance area, at 2580-2600.
Equity-only put-call ratios have finally begun to decline and thus are on buy signals. These buy signals are emanating from a very high (oversold) level, and that is usually a sign that this will be a strong buy signal.
Market breadth has been stupendous. The breadth oscillators remain on buy signals, and they are now quite deeply into overbought territory. That is not a problem as long as they stay in overbought territory.
The $VIX chart in Figure 4 has both bullish and bearish implications. The late December spike peak in $VIX continues to be a short-term positive. However, the trend of $VIX continues higher and that is intermediate-term bearish.
In summary, the short-term rally is still working off the massive oversold condition that existed in late December. It might have more room on the upside, since the put-call ratio buy signals have just taken place. But eventually, there will be problems and the possibility of the resumption of the bear market remains likely as long as the $SPX chart continues to be as bearish as it currently is.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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