MORRISTOWN, N.J. (MarketWatch) — Despite plenty of volatility, the stock market – as measured by the Standard & Poors 500 Index — has been unable to break out of its rather wide trading range. That might remain the case for the remainder of this year, but it is likely that early 2012 will see a significant move.
This is the time of year when even the media talks about seasonality. Of course, that doesn’t mean they understand what they’re talking about. Why would it be different on this subject than any other?
We have frequently mentioned the positive seasonality that takes place between Thanksgiving and Christmas. It’s unclear exactly why this happens, but it does. In fact, this particular seasonality doesn’t even have a cute name. But it certainly seems to work...
The broad stock market -- as defined by $SPX -- had a major failure today in that it could not break through the upside resistance at 1265 (the approximate location of the 200-day moving average).
Equity-only put-call ratios are now struggling to remain on buy signals.
Market breadth has continued to be a fairly accurate short-term indicator, and the breadth indicators are technically on buy signals even after very negative breadth today.
$VIX has become rather docile, and seems to be calling for more of a trading range environment.
While I am a technician, I am the first to admit that not every form of technical analysis yields useful information. In fact, being a mathematician, I really like to know why a particular indicator works – other than “it backtests well.”
In this video recorded at the TradersExpo Las Vegas, Lawrence McMillan, founder of McMillan Analysis, explains what he means by a "90% day," and why it can provide important signals for both traders and investors.
The CBOE Volatility Index (VIX) is sometimes referred to as an indicator which measures the cost of protection. To understand the thinking behind this definition, consider that most portfolio managers using listed options to protect their portfolio either buy S&P 500 Index (SPX) puts or VIX calls. SPX put purchasing is still the more common method. When demand is high for SPX puts, the price of those puts is typically forced higher, increasing their implied volatility and thus usually increasing the price of VIX.
This week's rally has improved the status of many of the indicators, but not necessarily the chart of $SPX itself. A breakout above resistance and the 200-day moving average at 1265 would be required in order to turn this chart positive.
Equity-only put-call ratios have turned bullish. Market breadth swings the most wildly as these volatile moves occur. Currently, breadth indicators are on buy signals and are not yet overbought.
In the continuing roller coaster that is this market, Monday was a “90% up day” of gigantic proportions. Advancing volume led declining volume by a nearly 40-to-1 margin, driving the Arms Index down to a near-historic-low of 0.12 for the day. It was a pure “90% up day” in terms of “Stocks only” data, and a “90% up volume day” in terms of NYSE-data. However, as strong as it was, it did not change the bearish slant of the intermediate-term indicators.
Just over a week ago, $SPX was probing the upper end of the trading range, a few days after a strong rally on Veteran's Day. But upside momentun slowed, and selling set in. Since then, the selling has fed on itself with ample aid from a series of unsettling news:
1) the continuing European debt crisis
2) the lack of results by the Super Committee
and 3) the MF Global bankruptcy.