Weekly Stock Market Commentary 12/23/2021

By Lawrence G. McMillan

Stocks plunged over 90 points at one time on Monday, December 20th. However, that produced enough of an oversold condition once again, that buyers stepped in and have taken $SPX all the way back to the top of its trading range, at 4700. The lower end of the trading range is 4500 (see Figure 1), although there is also support at this week's lows, 4530. $SPX has tried numerous times to break out over 4705 and hold those gains but has been unable to do so. But market internals have improved somewhat, so maybe this time it will happen.

Equity-only put-call ratios have continued to rise -- until yesterday (December 22nd), when they plateaued a bit. However, our computer analysis programs are still "saying" that these ratios are on sell signals.

Market breadth was abysmal when the market was going down, as usual. But it has recovered strongly with the rally since Monday, and now both breadth oscillators are on buy signals.

The implied volatility indicators are mostly bullish, but not totally. First, the $VIX "spike peak" buy signal remains in effect. It's the trend of $VIX which represents something of a problem. That is, $VIX has continued to close above its 200-day Moving Average, which is just below 19 and going sideways.

Once last point: seasonality is in favor of the bulls. As identified by the late Yale Hirsch, the Santa Claus rally period extends over the last five trading days of one year, and the first two of the next. Hence, that period begins with tonight's close (Thursday, December 23rd). If that seven-day period does not produce a positive move in $SPX, then trouble often lies ahead. Or, as Yale put it: "If Santa Claus should fail to call, bears may come to Broad and Wall."

In summary, with $SPX still in this trading range, we are not carrying a "core" position. However, a clear breakout to new closing and intraday highs would prompt a "core" long position, and it is probably closer to happening now than at any time in last month. I say that because of the improvement in market internals: equity-only put-call ratios, breadth oscillators, and New Highs vs. New Lows are on or nearing buy signals. But, still, $SPX has to prove it.

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.