Weekly Commentary

Tuesday’s low for $SPX was at 1538. That is now a support area, which may be tested as
soon as today. Below that, there is support at 1530. A violation of that level would
likely signal the onset of a deeper market correction.

Market breadth (advances minus declines) has weakened this week,
and both breadth oscillators are right on the verge of generating sell signals.

Volatility indices ($VIX and $VXO) spiked higher when the market dropped
on Monday, but then fellback sharply when themarket rallied on Wednesday.
In fact, $VIX moved 3 points below its 15.40 high – technically, a buy signal,
which is marked as a questionable buy signal. It’s questionable because $VIX
immediately began to riseagain – back to the 14 level on Thursday. Clearly,
if $VIX exceeds 15.40, that would be bearish, but if not, then the question mark
would be removed from the buy signal.

The construct of the $VIX futures has remained generally bullish. The March futures
expired on Wednesday, so April is the front month now. While April premium
at 0.95 is not large, the term structure slopes rather steeply upward, so that later months
do have large premiums. The combination of large futures premiums and an
upward-sloping term structure paints a bullish picture for stocks.

In summary, this week’s action (rising volatility and weakening breadth) has taken
some ofthe steam away from the bulls, putting the bears right on the verge of
taking control – at least for a market correction. But so far, the bears haven’t been able
to do so. Confirmed breadth sell signals, accompanied by $VIX above 15.40 and
$SPX below 1530 would indicate that a full-blowncorrection is underway.

Larry McMillan