Weekly Stock Market Commentary 12/3/2021

By Lawrence G. McMillan

Stocks have been down and volatile for the last week -- an unusual time of the year for that to be the case. The new omicron COVID variant is being blamed, but that was merely the catalyst for unleashing a lot of selling that has been building up. Market internals have been deteriorating for a long time.

The $SPX chart turned negative when it broke below 4630 on November 26th. In order for that chart to return to bullish status, $SPX is going to have to break out to new all-time highs (or work much lower and build a base). As a result, the entire area from 4630 up to the 4705 level is resistance. There is support in the 4500 - 4550 area. If that support gives way, there really isn't another support area until 4300, because the market rose so swiftly in October that it did not do any backing and filling to create support.

The equity-only put-call ratios are on sell signals and are racing higher on their charts, as put buying has picked up dramatically. These ratios will remain on sell signals as long as they continue to rise. Judging by the fact that previous buy signals this year (see Figures 2 and 3) have come at much higher levels, one would presume that these ratios need to get quite a bit higher before one can begin thinking about buy signals.

The market internals have been poor, and one might say they've been poor since about mid-June. One example is the put- call ratio signals above. But an even more glaring internal indicator failure is market breadth. Our breadth oscillators remain on sell signals, although they did drop into deeply oversold territory. But oversold does not mean buy.

This in the stock market decline has seen $VIX explode to the upside, and that has set off some reactions. First and foremost, the trend of $VIX is now higher. That is, the 20-day Moving Average of $VIX and also $VIX itself are both above the 200-day MA. That defines an uptrend for $VIX, in our terminology, and issues an intermediate-term sell signal. This crossover is marked on the chart in Figure 4 with a green circle.

There is one bullish thing that doesn't seem to be working too well: the usually seasonal pattern between Thanksgiving and the beginning of the new year. There is still time for this seasonal pattern to play out, although this is certainly its worst start ever.

In summary, we are no longer recommending a "core" long position. We will trade individual signals as they are confirmed, and right now most of those are sell signals. But things can change, and these oversold conditions will certainly lead to confirmed buy signals eventually.

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