McMillan Market Conmmentary 6/24

Oversold conditions had built up over the past couple of weeks, and they finally spurred a decent rally –
mostly all in one day this week (Tuesday). In some ways, it was a typical oversold rally, as it stalled out at the
declining 20-day moving average of $SPX. But it was actually weaker than most oversold rallies seen in the past.

In any case, as that rally unfolded, some of our indicators moved towards buy signals of their own, but
certainly not all of them. Let’s start with the most important indicator – the chart of $SPX itself. That chart remains in a bearish downtrend, with the series of lower highs and lower lows, and all pertinent moving averages in decline. There is resistance at 1298 (the highs of both Tuesday and Wednesday) and then above there at 1310. A close above 1310 would change the chart to neutral, but as long as $SPX remains below that level, it’s chart is bearish.

Equity-only put-call ratios raced higher over the past two weeks, reaching oversold status as the market continued to decline. Then, when the rally unfolded, the standard ratio rolled over to a buy signal, while the weighted ratio topped out as well. The weighted ratio is less clearly on a buy now, but the computer program that we use to analyze these charts calls it a “buy.”

Market breadth had become very oversold by the end of last week, and that helped spur the oversold rally this week. Now, both breadth oscillators are on buy signals. However, for a true breadth-oriented intermediate-term buy signal, we need to see breadth get overbought and stay there for a while. That has not happened, as breadth was negative again today – despite the late, strong rally.

Volatility indices ($VIX and VXO) have been rather wild. As we have mentioned previously, it took $VIX a
long time to start moving up even though $SPX was moving down. Finally, it made a fast sprint up to 24 and then fell back. That was a short-term buy signal that helped the oversold rally get underway. However, $VIX did not
continue to pull back. It made a double low at 17.72 on Tuesday and Wednesday of this week, and then moved
higher. In my opinion, the $VIX chart is still in an uptrend (i.e., bearish for stocks) unless $VIX closes below 17.70.

$VIX futures never reached an oversold status, or even anything vaguely approaching it. At last week’s lows, only
the front-month July $VIX futures were trading at a discount, and the term structure continues to slope rather
steeply upward. At a true market bottom – such as the one we saw this past March – nearly all of the futures will trade at a discount, and the term structure will flatten out almost completely. I still think there is a reasonable chance this will happen again before this intermediate-term downtrend ends, but it is not something we are going to insist upon prior to turning bullish at some time in the future.

In summary, we are seeing some indicators turning bullish, but not the chart of $SPX. This combination of
factors has been seen before, and the trend of $SPX is usually the “correct” indicator. So, we are remaining
intermediate-term bearish until $SPX closes above 1310 and $VIX closes below 17.70.