Stocks continued to rally early this week, creating some overbought conditions. Since then, the upward momentum has been lost, as the market is undergoing a short-term correction to work those off.
Equity-only put-call ratios remain on buy signals, as they generally have continued to decline.
Market breadth has begun to weaken as well. In recent days, breadth has begun to wane. As a result, the breadth oscillators are barely clinging to buy signals.
This article was originally featured in the 2/18/16 edition of The Option Strategist Newsletter.
The completion of the powerful, bottoming "W" formation at the beginning of March was the launchpad for this leg of the rally. It has more room to run.
Equity-only put-call ratios continue to remain on buy signals. The standard chart has seen a slight "wiggle" develop this week, but it does not dissuade the computer programs from continuing to say that these ratios are solidly on buy signals.
After the huge rally in the stock market, from the end of World War II to the exhaustive top in 1966, there were three bear markets – each one worse than the one before. They are shown as grey, shaded boxes on the chart below. Once those ended, the market began to rally – eventually culminating in the huge technology boom market of the 1990's. Since then, there have been two bear markets. Is this the beginning of the third?
Futures traders and traders of cash-based options have a tax advantage: on every trade, no matter how long the position is held, the results are considered 60% long-term gain and 40% short-term gain. These are called Section 1256 trades.
This tax treatment grew out of the 1986 Tax Reform Act, and it represents a possible boon to traders who have profits in those areas (futures or cash-based options).
We continue to think that this rally has more room to run on the upside, but that it will eventually give way to the over-riding bear market trendline.
Near-term, there is support at 1970 and then at 1950 (the top of the "W"). It seems that the pullback to 1970 this week was about all that the bears are going to get in the short-term.
Equity-only put-call ratios continue to drop steadily, and that is bullish for stocks.
The market has exploded to the upside this week. Some overbought conditions are beginning to appear, but all the indicators are on buy signals right now.
The move above 1950 completed a "W" bottoming formation on the $SPX chart, very similar to the one that existed last October. It should now be able o advance to the downtrend line of this bear market.
Equity-only put-call ratios continue to be bullish. They are declining from lofty (oversold) levels and are solidly on buy signals.