The Standard and Poors 500 Index ($SPX) is hovering near 1260 once again. What makes this significant is that this is the area not only of the 200-day moving average of the index, but it is also the point where the index meets the downtrend line connecting the recent market tops. A close above 1270 would be a clear upside breakout.
Both the standard equity-only put-call ratio and the weighted ratio are on buy signals.
Despite positive seasonality, strong upside momentum, and buy signals among the various indicators, the market — as measured by Standard & Poor’s 500 Index — has basically repeated what happened before: it has failed at resistance posed by the 200-day moving average and by the downtrend lines connecting the recent tops over the past few months.
In this morning’s comment, I mentioned that the previous two times $SPX failed to break through the area of resistance in the 1260-1270 area, it turned down sharply. That’s what the bears are trying to duplicate today. I’m not sure they’ll be able to do it during this period of seasonal strength, but they are giving it a good go nonetheless.
...We still expect a bear market to unfold – one that will be far more severe than what we’ve seen in the last few months (although perhaps not so volatile). It is likely that the next bear market will take out the 2009 lows, thereby souring an entire generation (or two) on stock ownership for much of their lives – as happened with investors in the 1930's.
Tuesday's big rally was enough to swing things over to the bullish camp, heading into the year-end. The continued bullishness has carried the market to the point where it has now reached the traditionally bullish Santa Claus rally time frame: the last five trading days of one year and the first two of the next.
The $SPX chart is confined by two trend lines (Figure 1). A breakout through either trend line should propel a sizeable move in the same direction.
With this newsletter, we have reached 20 full years of publication. Hopefully, there will be 20 more! As far as the stock market goes, it was a pretty wild year, but not necessarily out of character with the ever-increasing volatility that the market has exhibited much of the time in recent years. Ever since the manipulated interest rate environment and accompanying bull market of 2006, where $VIX repeatedly dipped below 10, markets have been volatile. It began with the volatility explosion in February 2007 and continues to this day.
For nearly two weeks, the market – as measured by the S&P 500 Index – had mostly declined. From a high of 1,261 on Dec. 7, the index fell to nearly 1,200 by last Monday, Dec. 19. As one might imagine, such a decline created an oversold condition.
The $VIX settlement occurred this morning (Wednesday, 12/21/2011) at the opening. It was a rather unusual settlement - something we've not really see before. Yesterday (Tuesday), at the close of trading, $VIX was 23.22, but the December $VIX futures settled at 23.80 – a 58-cent premium. The two, by definition, converge at the "a.m." settlement at Wednesday's opening. This in itself is a bit unusual, seeing that large of a premium with essentially no trading time remaining.
The oversold conditions, coupled with some positive news out of Europe, created a buying vortex yesterday. This was so strong, that it was (of course) a true "90% up day" in "stocks only" terms and a "90% up volume day" in NYSE terms. So, while the rally was enjoyable, it has already created an overbought condition.
In this video recorded at the TradersExpo Las Vegas, Lawrence McMillan, founder of McMillan Analysis, explains why VIX derivatives are the superior form of portfolio protection.
Focus: Portolio Protection