Short-Term Correction, or More?

By Lawrence G. McMillan

The market finally suffered some selling yesterday.  This didn’t cause any more of our indicators to turn negative, but breadth indicators are getting close.  Even so, we have enough sell signals in place to call for at least a short-term correction.  One of the more bullish things, though, is that the parade of “analysts” on CNBC is uniformly bearish.  This includes a number who are perma-bulls for the most part; but now they are calling for a correction.  That makes me a little nervous about put positions, but we will use our indicators and try to shut out the “noise.”

$SPX has support at 1950 – which, if reached, would be a slight overshoot of the 20-day moving average (now at 1955 and rising).  It is normal for overbought corrections to slightly penetrate below the 20-day, something that hasn’t happened since mid-May.  There is also support at 1925, which is about where the lower “modified Bollinger Bands” currently are.  As an aside, last Thursday’s close in $SPX at 1985.4 was just below the upper +4-sigma MBB (at 1985.6), so yesterday’s close – which was below the +3-sigma Band – was not a new mBB sell signal, but the previous one is still in effect.

Equity-only put-call ratios are both on sell signals, and those have strengthened.  So this is an important indicator, and it is probably not a coincidence that the market has started to turn down just as these two both agreed on sell signals...

This commentary was excerpted from this morning's edition of The Daily Strategist newsletter.