Stocks have continued to move higher across all of the major averages. As might be expected after an advance of this magnitude and length, overbought conditions continue to abound.
One of the foremost things to consider, though, is that the chart of $SPX remains bullish. It continues to trend higher, with all moving averages in sync. The first major support area is at 2300.
Both equity-only put-call ratios continue to decline and thus remain on buy signals.
The past year was another good year for the performance of The Option Strategist Newsletter (TOS). For the year, overall, TOS performance was a gain of 34.6%. The largest area of profit were the futures put ratio spreads, followed by a superior performance from the put-call ratio recommendations. SPY put ratio spreads also performed well, as did event-driven straddle buys. The worst area of performance was the DSI-based recommendations (more about that later).
Exactly a week ago, on February 9th, $SPX broke out over 2300, establishing new all-time highs, accompanied by almost all of the major averages, including finally the small-cap Russell 2000 ($RUT). The chart of $SPX remains bullish as long as $SPX is above 2300.
Both equity-only put-call ratios have turned sharply lower in the past week, as the upside breakout has been accompanied by heavy call buying. Thus they remain on buy signals.
Overall, breadth has been positive so the breadth oscillators remain on buy signals.
$VIX is overbought, too, in that it is at very low levels. But even so, $VIX remains in a bullish state for stocks as long as it is below 15.
The stock market, as measured by most of the major indices, made a breakout move to the upside yesterday and is now trading at new all-time highs once again. $SPX is clearly in an uptrend and holding above all support areas, which is bullish.
Equity-only put-call ratios continue to crawl along the bottom of their charts, moving mostly sideways rather than up or down. This is another overbought indicator, but it won't really become bearish until these ratios begin to trend higher.
Market breadth has been struggling somewhat as it has not kept pace with the strength of the broad market. But the breadth oscillators are on buy signals, nonetheless.
Long-term cycle charts are interesting to look at, but I’m not sure how much they help one’s trading or strategy. In any case, there is a website, www.seasonalcharts.com that has such charts, and one that can be quite interesting is the 10-year cycle chart of the Dow. In other words, the data for the Dow is accumulated by year and then published in a way that you can see the pattern of each year of the decade – going back to 1897 in this case.
The broad stock market has gone into a very tight range over the last four trading days. After what had appeared to be a promising upside breakout on a gap a week ago Wednesday, there was no follow-through on the upside. Meanwhile, there has been no follow-through on the downside either. The $SPX chart remains bullish from a trending viewpoint.
Equity-only put-call ratios continue to plow along at very low levels, meaning they are in overbought territory. But they are rather noncommital until they begin to rise out of this area and trend solidly higher.
Yesterday was not a good day for stocks, but considering how far the rally has come in the last few months, it wasn’t too surprising to see a setback of sorts. However, the selling generated some sell signals and it has left a warning sign on the $SPX chart – an island reversal. One does not often see islands on the averages because the electronic computation of the Index begins as soon as any stock in the index opens. If there is a gap on the $SPX chart, it essentially means that nearly all of the stocks are opening on gaps. In any case, an island reversal of this sort is a big negative.
As a general rule, I am not in favor of shorting the market when $VIX is “too low.” That is usually a loser’s game, as the market doesn’t turn downward until $VIX begins to trend upward. However, there is a combination of factors that we researched a long time ago (at least 10 years) that is now coming up again.
$VIX was invented by Professor Whaley for the CBOE and first published in 1993. That version of $VIX used only 4 series of $OEX options. It used the two front month options, and the two nearest strikes that surrounded $OEX’s price. It was backdated to 1986 so that the Crash of ‘87 could be in the data.
The broad stock market, as measured by several indices, but particularly by the S&P 500 Index ($SPX) has broken out to new all-time highs. Other indices that have done the same include the Dow ($DJX), NASDAQ Composite, NASDAQ 100 ($NDX), Midcap 400 ($MID), and the NYSE Index.
This breakout has reaffirmed the bullishness of the $SPX chart, as that had come under some doubt with $SPX mired in the 2255-2280 trading range. Now the 2280 area is support, as is the 2255 area. Below that, there is major support at 2233 (the December lows).
This system has been successful over the years. It is a short-term trade, wherein we buy “the market” at the close of the 18th trading day of January. The position is sold four trading days later. The basis for this system is that institutions usually receive large cash infusions in (early) January. They employ this new capital somewhat judiciously during the month, but by the end of the month they want to be fully invested so that a large cash balance is not showing on their month-end reports. Hence they buy at the end of January.