McMillan Market Commentary 6/03

The stock market has continued to swing back and forth, with a generally negative bias to the overall movement. Since the brief, intraday rally on the news of the death of Bin Laden, the market has been trending lower. The general pattern has been lower highs and lower lows. Recently, there have been some large moves in both directions, with the most recent coming on the big down day this week. The previous one was a large rally last week. Both were in response to overbought or oversold conditions, which seem to occur with great ease. In fact, the market can’t seem to get any real trend going because as soon as it moves in one direction for a few days, it has expended so much energy that it is overbought or oversold, and then is easy prey for a reversal in the other direction.


Currently, the dominant theme of the $SPX chart is its downtrend. Also, today it violated what had been a series of lows (support) in the 1310-1315 area. The next support level is near the 1300 level. There is now resistance at 1330, and above that, at 1345.


The recent market move downward has had the effect of decreasing the premiums on the $VIX futures, for they did not rise as quickly as $VIX did. In fact, the front-month June futures are at a discount to $VIX. That by itself is not significant, but if all the futures were to trade at a discount, as they did last March, that would be the makings of a strong buy signal. The longer-term futures are trading with fat premiums, though, so there is no such buy signal on the horizon at this time.


The term structure of the $VIX futures continues to slope upward, and that retains its longerterm bullish outlook as it has done since March, 2009. October $VIX futures settled today with a premium of 4.26 to $VIX, not nearly as large as a few weeks ago, but still quite large historically. Thus, traders are still willing to pay a high premium in terms of implied volatility to buy protection for the fall of this year.


In summary, the indicators are generally negative. The $SPX chart and the equity-only putcall ratios did not turn positive even during the rally of last week. It was left to breadth and $VIX to generate short-term signals. At this point, neither is oversold, and both are somewhat negative, as are the alternative volatility measures. The only oversold conditions are the recent 90% down day and the total put-call ratio. It should also be noted that the Unemployment Report, due in the morning, is a matter of some concern for the market as well. Its announcement is likely to spur some volatility in the market. But the big picture is that the market is still in an intermediate-term