McMillan Market Commentary 6/17

The market has had a rough week as the dominant bearish traits of this market have emerged. A couple of oversold rallies have been attempted, but they have been unusually weak. The chart of $SPX is in a downtrend and that is the major trademark of this market. Until that is reversed, there will be a bearish intermediate trend in force. The declining 20-day moving average is at about 1304 and dropping at the rate of about 3 points per day. Any oversold rally of more than a day’s duration would likely carry to that level or just beyond.


The equity-only put-call ratios are both on sell signals. They are continuing to rise rapidly, and thus might be considered oversold, but they will be bearish until they roll over and begin to trend downward. The total put-call ratio, which was the feature of last week’s newlsetter has not given a buy signal yet. Its 21-day moving average continues to rise. It is currently at 0.9696. A buy signal will not be given until there is a 10- day peak in that moving average.


Another little-watched put-call ratio is quite oversold as well: the CBOE’s equity-only put-call ratio. It had not had a daily reading above 1.00 since January of 2009 until this last week. Now, 3 of the last 5 trading days have seen this ratio above 1.00. We will write a more in-depth article about it in the next newsletter, but suffice it to say that when this CBOE equity-only ratio gets above 1.00, there is usually a sharp, one-day advance in the market. That could be as soon as today.


The breadth oscillators are on sell signals, and are in oversold territory. When there was a rally earlier in this week (Tuesday), the NYSE-based ratio briefly flopped over to a buy signal, but that has happened before (with little consequence). Therefore, we do not regard any lone breadth signals as significant. There was a 90% down day on Wednesday. That, too, is an oversold condition that usually augurs for a sharp up day soon thereafter.


The volatility indices ($VIX and $VXO) are perhaps the most interesting indicators. This has been the case for some time, as we have seen them have significant confirming or non-confirming moves in the last few weeks. At the current time, $VIX has broken out to the upside, establishing an uptrend on the $VIX chart. That is bearish for stocks. Prior to the last few days, $VIX was not really rising even though the market was falling. Bulls (especially those on TV) were saying that this was a bullish divergence. We, on the other hand, were saying that

this was a dangerous sign of complacency – that $VIX would eventually have to catch up. And now it is, with a vengeance. Thursday’s action was particularly surprising, in that the market rallied (Dow up 64, $SPX up 2) yet $VIX was up strongly – rising 1.41. That is almost unheard of and is clearly a bearish sign.


A spike peak reversal in $VIX would, of course, be a buy signal. But $VIX would have to reverse below 19 for that to be the case, and right now it’s going up, not down.


The $VIX futures have not kept pace completely with $VIX on the upside, although that is normal. But the rise in $VIX has pushed the new front-month July futures to a discount of 0.78, which is starting to get significant. The August futures are also at a slight discount. But the other futures remain at a premium and the term structure remains sloped upward. I have come to the conclusion that this is no longer a confirmation of any bullish case, but is another sign of complacency. At the March lows, all the futures were at a discount and the term structure had

completely flattened out. This intermediate-term decline won’t end until the same conditions apply.


The big picture is bearish. All of the intermediate-term indicators are on sell signals. The bulls just can’t seem to acquiesce (witness the new term “soft soft patch” instead of just saying that we are on the brink of another recession; and then they seem surprised when each new negative economic statistic appears, causing them to sell more). Their actions are evident in the option market, especially in volatility terms, where they have kept things suppressed for some time, but are no longer able to do so. Oversold rallies that could carry to or just above the declining 20-day moving average in $SPX are possible, although so far they have been feeble one-day affairs at best.




Expiration has a bearish bias, although it is not too large at current levels. However, if $OEX falls

below 560 by Friday’s close (it’s currently just above 565), then sell programs could be big enough

to cause the broad market some problems.