Weekly Market Commentary

While there are still some mixed signals for stocks, some very powerful signals have lined up so that the bulls once again have a chance to take control of this market.

 Friday’s strong semi-holiday rally brought SPX all the way back to the top of a resistance area at 1,400-1,410. The declining 20-day moving average is at 1,395, and the trend line (see chart) is at about 1,400. So that general area of 1,395 to 1,410, which was support on the way down, is now resistance. It is normal for support to become resistance. Now, the onus is on the bulls to try to recover back above that level, if they can.

Volatility indexes (VIX & VXO) have been in a general state of decline, even though SPX was falling. This is quite unusual, but it does demonstrate that volatility traders do not fear this market decline too much. As a result, VIX dropped below 16 last week, and it has remained there.

The construct of VIX futures has taken on a more bullish tone lately, with VIX futures gaining premium, and the term structure steepening somewhat. So it seems that there is still demand for protection in the later months (VIX itself only uses the two near-term months in its calculations, and that is where the selling of protection is taking place). In a sense, traders may be rolling their protection from near-term options to longer-term options.

In summary, these indicators are starting to look a lot more bullish, with equity-only put-call ratios on buy signals, market oscillators already on buy signals, and VIX dropping below 16, which is also bullish. The total put-call ratio is going to give a buy signal in the near term, as well. Furthermore, there is a bullish seasonal pattern that normally sees the market rise after Thanksgiving and well into December. Even so, we would want to see SPX overcome resistance at 1,410 on a closing basis, before turning intermediate-term bullish.

That’s not too far away, and we expect it will be accomplished soon.

Larry McMillan