Weekly Stock Market Commentary 9.20.13

$SPX exploded to the upside after the Fed’s announcement that they
were not going to taper, with both new buying and short covering
entering into the fray.  With $SPX now at new all-time highs, it has
positive momentum, but is also extremely overbought.  This latter
condition will eventually lead to some sell signals, but perhaps not
right away.

LM 9 20 spx

$SPX should find support at 1710, the previous high, from early
August.  A close below there would raise the specter of a false breakout.

The equity-only put-call ratios never did pick up on the rally. When both the put-call ratio and the underlying are rising together, that is a sign that hedging is prevalent.  In this case, traders were buying puts for protection.   Now, both ratios are on buy signals.

Market breadth indicators are bullish, but extremely overbought.

With $VIX 14, we judge that as bullish for stocks.  In fact, as long as $VIX remains below 15, it is in a bullish state for stocks.

LM 9 20 vix

In summary, the bulls are in charge.  Even though they have expended a lot of energy to get to this point, it is likely that prices will still move higher before sell signals eventually appear from the overbought indicators.

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Larry McMillan


Professional trader Lawrence G. McMillan is perhaps best known as the author of Options As a Strategic Investment, the best-selling work on stock and index options strategies, which has sold over 300,000 copies. An active trader of his own account, he also manages option-oriented accounts for certain individuals. In a research…