By Lawrence G. McMillan
It looks like things are going to be very interesting in the new year. The market is strong, as evidenced by new all-time highs in all of the major indices this past week $SPX, $NDX, $DJX, and $RUT (although $RUT has faltered a bit in the last couple of days). Since price action is the most important indicator, the overall trend remains bullish as long as $SPX holds above support.
There is very short-term support at 3725. Below that, there are two important support areas, both of which are marked with horizontal lines on the chart in Figure 1. The first is at 3630-3650, and the second is at 3550.
From the charts in Figures 2 and 3, you can see that the equity- only put-call ratios have started to turn higher. Whether or not these are valid changes of sentiment or merely a reversion to the mean from a severe overbought correction remains to be seen. Breadth has deteriorated somewhat and is flirting with a confirmed sell signal. One or two days of negative breadth will provide that confirmation.
Volatility is interesting in that $VIX remains at relatively high levels -- between 21 and 23 -- even though realized volatility is down to 8. Obviously, traders are stocking up on $SPX puts expiring next year, but that doesn't mean they're correct in doing so. The only signal we have from $VIX right now is the "spike peak" buy signal that took place on December 21st.
In summary, at this moment, the major indices have strong bullish momentum and are at or near all-time highs. Moreover, we do not have any confirmed sell signals at this time, except for the possible "reversion to the mean" move by the equity-only put-call ratios. So, what could possibly go wrong? Well, there are plenty of sell signals that could be setting up. So, it is necessary to remain bullish but vigilant.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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