While we’re on the subject of seasonality, let’s review what happened over the past two years, because the seasonality did not remain bullish throughout the “usual” period. The “usual” period is that the market rises from the day before Thanksgiving through the second trading day of the next year. There are really three seasonal patterns that comprise that entire time frame: a) the post-Thanksgiving bullishness, b) the “January effect,” which now takes place in December and has for many years, and c) the “Santa Claus rally.”
The S&P 500 index ($SPX) has tagged its upper “modified Bollinger Bands” (mBB) a couple of times recently, but in neither case was a sell signal triggered. So far, this has been the “correct” move, as $SPX has moved higher. Eventually, though, this sell signal will take place, and one should be prepared to act on it. Figure 5 shows a close-up of the recent action in $SPX.
The bullish juggernaut was finally slowed a bit this week by the Fed's decision to raise interest rates (or at least, that was the excuse for some profit-taking). However, the chart of $SPX remains very strong, and this is a period of highly bullish seasonality.
Put-call ratios are remaining bullish. Both equity-only put-call ratios are declining daily, although the pace of their decline has slowed over the past two days. Even so, a declining put-call ratio is bullish for stocks.
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Nearly every day, one hears a trader on TV telling you to “buy protection, because it’s cheap.” Is it, really? Yes, $VIX is low, so that means that overall implied volatility of $SPX options is low, and therefore by inference, one might think that $SPX puts are cheap.
It’s more complicated than that. It depends on two things that these commentators never mention – the skew of the $SPX puts, and the term structure of the $SPX puts (or the $VIX futures, if you prefer).
This has been a very strong week for the stock market. New highs have been registered by all the major indices. Not only have all of these major averages traded at new all-time highs, but these moves have been accompanied by strength from the technical indicators. The only problems that are cropping up are those from an overbought market, but as readers know "overbought does not mean sell."
There is support all through the 2170 to 2190 area. As one might expect, call buying has been heavy this week, dominating put volume. Hence the put-call ratios are dropping rapidly. That means that both of the equity-only put-call ratios are on buy signals.
The bulls finally took total control for a day as nearly every major average broke out to an all-time high (the one exception – the NASDAQ Composite – is within a mere 5 points of a an all-time closing high). $SPX advanced so swiftly that it is now above the +4σ “modified Bollinger Band.” As such, a sell signal will definitely occur in the near future, when $SPX closes back below the +3σ Band. Today, that would require $SPX to fall to 2227 – a drop of 14 points. The +3σ Band is moving higher daily, though, so that number will change as the days go by. An mBB sell signal will be a significant negative, but it is not necessarily an immediate sign of the top of the market. The last two mBB sell signals were in November 2014 and October 2015.
The recording of McMillan Analayis Corp. President, Lawrence G. McMillan's recent webinar with Investor Inpsiration is now available. In this webinar recordied on 11/216, McMillan touches on the following points:
$SPX has struggled this week, but it remains above the rising 20-day moving average, so the $SPX chart is still bullish. There is support at 2180, but the more important support is at 2170. As long as $SPX is above that level, the chart will be bullish.
The put-call ratios are generally bullish at this time. The weighted equity-only put-call ratio (Figure 3), gave a buy signal just about the time of the election, and it has remained on that buy signal ever since. The standard ratio (Figure 2), however, ran into some problems along the way, but it is now back on a buy signal as well.
All systems are in bullish modes at this time. $SPX has broken out to new all-time highs, finally catching up to The Dow, Th Russell 2000, the Value Line Composite, and the NASDAQ Composite, which had already done so. There is support in the 2180 area.
Equity-only put-call ratios are on buy signals, as is the Total put-call ratio. These are not strong buy signals, by historic measurements, but suffice for now.
Breadth has been very strong on this rally, and with today's action, cumulative "stocks only" breadth has made a new all-time high as well. This is important confirmation. Both breadth oscillators are on buy signals.