The feature article is our annual market review and forecast issue. Forecasting has taken a back seat to Fed watching these days, but we present some data on how markets in general have fared after two strong years, such as the two that have just concluded.
The rally that began last week with the Fed announcing tapering has broken out strongly to new highs. The fact that this occurred during a seasonally bullish period has certainly helped, too. $SPX will remain bullish as long as it holds above support at 1810.
Equity-only put-call ratios are shown Figure 2 & 3. Both are at new lows now, and as such they are both on buy signals (because they are declining) and they are overbought (because they are so low on their charts).
Even with the volatiilty following the FOMC meeting, SPX still has not broken out of the 1775-1812 range on a closing basis. If it DOES break out to the upside, the positive year-end seasonality should help.
The equity-only put-call ratios moved to sell signals about a week ago, but those signals are now wavering.
Market breadth gave buy signals earlier this week, but now those two breadth indicators are mixed: one on a buy; the other on a sell.
The feature article was designed to be a piece about the January Effect (the period of time when small-caps outperform big-caps, after tax loss selling has ended). But the study revealed some new facts about seasonality, and we make a modification to our Post- Thanksgiving trade because of it.
You’d have to be a pretty long-term subscriber to remember when we used to trade the January Effect. For a long time, it worked like a charm, but then traders started to anticipate the effect, shifting its time frame, and then it stopped working altogether – obliterated, it seems, by conflicting forces, seasonality, and changing market conditions.
The market -- as measured by the S&P 500 Index ($SPX) -- has declined on eight of the last ten days, and that has taken a toll on the technical indicators. However, $SPX is sitting right on support at or just below 1780 (see Figure 1). Hence, shorting the market now could be a mistake.
Lawrence McMillan was recently interviewed at The Disciplined Investor podcast where he explained some of the ways in which investing with options can be beneficial. Larry also discussed some of his favorite strategies and advised which he stays away from. Listen to the full interview by clicking here.
From a broad viewpoint, using our indicators, the picture is actually fairly bearish except for one major thing: the price chart of the Standard & Poors 500 Index ($SPX) has not broken down. A decline below 1780 would also interrupt the bullish pattern that currently exists of higher highs and higher lows on the $SPX chart.
