Weekly Commentary 9/14/12

By Lawrence G. McMillan

The stock market continues to march higher, listening to its own bullish rhythms and eschewing the potentially bad news that has kept many investors on the sidelines.

Today's rally has taken $SPX all the way up to the upper band of the bullish channel that has defined this market since early June.  That in itself is an overbought condition of sorts.  Today's highs also exceed the late 2008 highs, so the next target is the late 2007 highs, near 1500.

Equity-only put-call ratios are mixed.  The standard ratio (Figure 1) is still falling almost every day and thus remains soundly bullish.  On the other hand, the weighted ratio (Figure 2) has already begun to rise and is thus on a sell signal.

Market breadth indicators have been modestly positive of late. As a result, they are on buy signals and are now getting fairly overbought again.

Volatility indices ($VIX and $VXO) have been rather stubbornly high for much of the last month, but they have now declined sharply and are bullish for stocks in that they are in a downtrend on their charts.

In summary, we remain bullish, but the odds of a correction are increasing dramatically with overbought conditions and just plain too much of a buying spree.

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