By Lawrence G. McMillan
Supposedly because of the China trade talks, but probably as much because the market was overbought and tired. $SPX headed lower this week. Several support levels have since been violated, but not all of them. This could still turn out to be a minor correction if support at 2800 can hold. However, caution is certainly warranted at this time, as the burden of proof is now on the bulls. The most negative aspect is that there is a double top in place now.
Equity-only put-call ratios are decidedly bearish, both to the naked eye (they are rising) and to the computer analysis programs.
Market breadth oscillators had been weakening even as $SPX was making new highs. There had been a couple of premature sell signals, and now another sell signal is in place.
Finally, this brings us to volatility. $VIX has been the friend of the bulls for so long that it's hard to remember when it wasn't. $VIX was benignly trading below 17 (on a closing price basis) for months. But this past week, that changed, and $VIX blasted to the upside. By closing above 17, it is now in an uptrend, which is negative for stocks.
However, in a short-term bullish move, $VIX spiked up and back down again, and that could cause a sharp, short-term rally.
In summary, despite a bevy of negative indicators, as long as $SPX support at 2800 is not violated, this could turn out to be a mere correction, but it's too soon to say that will the case.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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