Weekly Commentary 8/24/2012

By Lawrence G. McMillan

For most of the last two weeks, the Standard & Poors 500 Index ($SPX) plowed ahead, finally making new post-2008 highs this past Tuesday.   Our intermediate-term indicators have been bullish for over two months now, so these new highs were in line with those indicators. However, as soon as the new highs were made, $SPX began to retreat, and an overbought correction now appears to be underway.

$SPX remains within the bullish channel (see Figure 1) that has defined this advance since early June.  A correction to the lower end of the channel would mean $SPX near 1370-1380.

Equity-only put-call ratios have remained on buy signals.

Market breadth has been weakening some of late, and the two breadth indicators that we follow issued sell signals earlier this week.

Volatility indices ($VIX and $VXO) dropped to extremely low levels this week.  In fact, both traded at levels last seen in June, 2007 -- over five years ago.  As long as $VIX is trending lower, that is bullish for stocks -- even if such a low $VIX reading is yet another overbought condition.

In summary, overbought conditions and a breadth sell signal might be noting the beginning of a short-term market correction. However, for now the intermediate-term indicators remain positive, so we would view any correction as a buying opportunity

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