The broad stock market, as measured by $SPX, has traded in a very narrow range since early December (with one very brief excursion below the range in late December). That range is essentially 2250 to 2280, an amazingly small range for a 5-week period of time. As a result, realized volatility has declined to very low levels.
Looking at the more traditional support levels, the first is at 2233 (the late-December lows), with support at 2210 and 2190 below that. As long as $SPX remains above that 2233 support level, we cannot turn bearish, despite what the other indicators might be saying.
After all the positive seasonality that surrounds the end of a year (Post-Thanksgiving rally, Santa Claus rally, January Effect), it is probably not too surprising to learn that there is a system that relies on a bearish seasonal pattern. That is, after about 8 to 12 trading days into a new year, the stock market – particularly, the NASDAQ market – tops out and trades lower for a week or so. This year, with NASDAQ being so strong, one wonders whether the system will work. But there have been times in the past where the system has worked even when NASDAQ was relatively strong in comparison to SPX. The system is sometimes known as “The January Defect.”
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The stock market has split into two parts recently. Most of the major averages are moving sideways, but staying within easy range of new all-time highs. The NASDAQ Composite, however, and its smaller companion the NASDAQ-100 ($NDX) have been making new all-time highs frequently. This should be a good thing.
The $SPX chart remains bullish in that its trend lines are sloping upwards and support has held. There is support at 2233, and then at 2210 and 2190 below that.
A bearish development has taken place in the equity-only put- call ratios, as both have rolled over to confirmed sell signals. Market breadth continues to bounce back and forth.
There was finally a little volatility yesterday, as President-elect Trump’s news conference halted a rally dead in its tracks. There were two resulting selloffs, but by the end of the day, $SPX had recovered and closed on its highs. It now once again stands less than two points from new all-time highs. Meanwhile, the NASDAQ Composite and its smaller companion $NDX made new all-time highs once again. Since the election, the NASDAQ Composite has made new all-time highs on 13 different days – including the last five days in a row! This is clearly where the market’s strength is at this time. Overnight, $SPX futures have been on the defensive all night and are now down about 9 points from yesterday’s close.
The media confuses the various seasonal trading patterns that occur in January, but the January Barometer states that “As goes January, so goes the year.” This adage is about to be tested again this year.
The January Barometer had a long, successful track record for many years (using the $SPX index as “the market”). According to the Stock Trader’s Almanac (www.stocktradersalmanac.com), the Barometer – which was devised by Yale Hirsch in 1972 – has had only 8 “significant” errors in 66 years. The Catch 22 here might be the word “significant.”
From my point of view, it has failed for the last three years...
Overall, the $SPX chart -- which is, by definition, the most important indicator -- remains positive. $SPX did have a pullback at year's end. The subsequent rally off of the 20-day moving average leaves support at 2233 (last Friday's lows). Below that, there is support at 2210 and 2190 (all marked on the chart in Figure 1).
The equity-only put-call ratios have pushed lower as the rally has continued. That means they remain on buy signals.
Market breadth continues to be the most volatile indicator, flopping back and forth with the short-term movements of $SPX. Most recently, breadth was strong enough to cancel out the previous sell signals and return both breadth oscillators to "buy."
This week, the OCC sent out a notification that VMIN was going to split 2-for-1. Because the symbol seemed like something related to volatility, I checked into it. What I found was an ETF that looked potentially interesting, and that had been listed last May. For some reason, I had never heard of it, so I decided to check it out.
The final analysis on the $SPX chart is that it is still rising, with rising trend lines, and that means that it is still bullish. In the more traditional sense, there is support on the $SPX chart at 2210 and 2090.
The equity-only put-call charts remain on buy signals. The standard ratio (Figure 2) has continued to decline without much interruption since the last buy signal in early December. It is still not all the way to the lowest levels on its chart, so it is not severely overbought. The weighted ratio, on the other hand, is overbought, as it has been bumping around at very low levels.
We first published an in-depth article on this subject at the end of July, 2016. Since that time, the market has mostly gone higher, and no significant top has formed. Since the U.S. election, especially, the market has rallied strongly. Now, having reached an overbought state, some sell signals are beginning to appear. This is a review of current conditions vis-a-vis the four major tops that were discussed in the previous article.