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Opinion: Stock-market bulls are in control — but what a tight range for the S&P


The S&P 500 index continued to trade at new all-time highs through Sept. 2, but has faltered a bit after Labor Day (in particular, after the unemployment report on Sept. 3). Still the trend of the SPX
SPX,
+0.06%

chart is positive in that it remains above support and the moving averages are rising.

The advance since the last correction of any significance in mid-August has been strong and swift. That’s the good news. The bad news is that the only verified support level – at 4370 – is well below current prices. There might be support near 4460, but it has not been tested. For now, there is resistance at the all-time highs at 4545.

Looking at closing prices only, SPX has wound down into a very tight range between 4509 and 4536. A breakout from there might generate some short-term momentum. Meanwhile, the narrowness of this closing price range has reduced the S&P’s realized volatility (the 20-day historical volatility, HV20) to 7%, which is a very overbought level.

But markets can remain overbought for long periods. It would only become worrisome if HV20 rises above 10%. That would be a sell signal.

Despite this decrease in HV20, and the concomitant constriction of the “modified Bollinger Bands” toward the rising 20-day Moving Average of SPX, SPX has still not touched either of the +/-4σ Bands since early July. That means that the MVB sell signal from back then is still in place.


Lawrence McMillan

Equity-only put-call ratios have improved. The standard ratio is clearly on a buy signal, meaning that it is declining. There has been relatively heavy call buying – especially in terms of volume – since those lows in mid-August.

The weighted ratio is not so clear. It is below its recent highs, but only moving sideways. The computer programs that we use to analyze these charts are still “saying” that the weighted ratio is on a sell signal. To the naked eye, though, it does not look that way. Hence, the question mark on the chart.

What this is telling us is that while the volume of call buying is heavy, not that many dollars are being spent on those calls. Hence the standard ratio looks much more bullish than the weighted ratio.


Lawrence McMillan


Lawrence McMillan

Market breadth made a valiant attempt to improve, but ultimately that attempt failed. Over a 10-day stretch beginning on Aug. 20, breadth was strongly positive. That pushed the breadth oscillators from deeply oversold onto buy signals. Eventually they reached modestly overbought territory. Now they have failed again, and so the breadth oscillators have returned to sell signals.

Meanwhile, the cumulative breadth indicators continue to lag behind. Yes, cumulative volume breadth based on “stocks only” data did make a new all-time high for one day, but the conventional breadth measures, as well as the NYSE cumulative volume breadth are well below their all-time highs.

This is in sharp contrast to the S&P, which has been reeling off a series of new all times (as has the NASDAQ-100
NDX,
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). Thus the negative divergence of which we have spoken many times remains in place. This alone is not a timing indicator and is not a sell signal. But is a warning to stay alert and to heed your stops. One of the most severe (and costly) forms of complacency is to ignore your stops in a bull market.

New 52-week highs continue to outnumber new 52-week lows, although that differential has shrunk considerably this week. In any case, this indicator remains bullish for the stock market, for now. However, a jump higher by new lows (high enough to exceed new highs) would…



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