By Lawrence G. McMillan
This is supposed to be a positive time of the year for the stock market -- the so-called "Santa Claus Rally" period. Typically, the market advances about 1% during the last five trading days of one year and the first two of the next. But If this seasonal period ends with a loss, that is generally negative for the broad stock market. As the creator of this system, Yale Hirsch, said: "If Santa Claus should fail to call, bears may come to Broad and Wall." Classic!
As for the $SPX chart itself, it is still in a bear market downtrend (blue lines in Figure 1). There is resistance at 3900- 3940, and the breakdown below 3900 last week was meaningful. Above there, resistance exists all the way up to the early December peaks near 4100. Below that, there is support at 3700 and then at the yearly low of 3500.
Equity-only put-call ratios continue to press higher, thus remaining on sell signals. There has been a considerable amount of put buying recently. These ratios are nearing the tops of their charts, which means they are oversold. But they will not generate buy signals until they roll over and begin to trend lower.
Breadth had been struggling as well -- until the large, 90% up day yesterday (December 29th). That was enough to generate buy signals from both breadth oscillators. However, we know that these breadth indicators are subject to whipsaws.
Indicators surrounding $VIX and volatility trading instruments remain positive for stocks. The $VIX "spike peak" buy signal of December 13th remains in place. Also, the trend of $VIX buy signal remains in place.
In summary, we are maintaining a "core" bearish position in line with the downtrends on the $SPX chart, and with the significant breakdown below 3900. As usual, we will trade confirmed signals from the other indicators around that "core" position.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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