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.