Breadth At All-Time High

By Lawrence G. McMillan

Stocks roared ahead for about half the day on Friday, before finally selling off after 2pm.  The overbought conditions continue to grow, though, and with them the possibility of a sharp, but short-lived correction.

$SPX nearly touched the +4-sigma “modified Bollinger Band” (mBB) on Friday, and it closed above the +3σBand again.  Those are evidence of an overbought situation.  There is now short-term resistance at 2010, which was a previous support level back in December.  There is support at 1950.

Equity-only put-call ratios remain on buy signals.  They are dropping sharply now, as large numbers continue to roll off the 21-day moving average, while the numbers coming on are not nearly that large.  Even so, there is still plenty of put buying being done by traders who don’t trust this rally.  About the time that they give up on that attitude, the market will peak.

Market breadth was strong again.  Despite the late selloff, breadth finished strongly positive.  The “stocks only” breadth oscillator made another new all-time high, while the NYSE-based oscillator is now at the 7th highest level in its history.  These are further evidence that a short-term correction is likely.

Volatility indices were relatively unchanged on Friday, again reflecting the fact that some traders are interested in buying protection. $VIX remains in a benign spot, so that stocks can rally while $VIX is in this state.

In summary, the short-term outlook is still bullish (Because the indicators are still on buy signals), but the overbought condition is likely to be relieved by a sharp, but short-lived correction.  The longer-term picture is still bearish because of the downtrend in existence on the $SPX chart.

This market commentary was featured in this morning's edition of The Daily Strategist.