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."
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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.
First and foremost, it must be noted that the chart of $SPX is still in an uptrend. The 20-day moving average is rising, and no major trend lines have been broken. $SPX has rallied so hard and so fast since the election that it is quite a ways above support, which is 2210 and 2190. As long as that support holds, the chart of $SPX will arguably still be in an uptrend.
Last July 29th, we wrote an in-depth article on “Spotting Market Tops.” The things that we talked about in that article are beginning to happen. No one has been more “on board” with this post-election rally than we have, as a number of seasonal and oversold conditions combined to produce good buy signals. But now the signs of a top are beginning to appear, and we do not want to be caught unaware. We will publish a blog this week with some specific updates on how what’s happening now fits (or doesn’t fit) the pattern of past tops.
While we’re on the subject of seasonality, let’s review what happened over the past two years, because the seasonality did not remain bullish throughout the “usual” period. The “usual” period is that the market rises from the day before Thanksgiving through the second trading day of the next year. There are really three seasonal patterns that comprise that entire time frame: a) the post-Thanksgiving bullishness, b) the “January effect,” which now takes place in December and has for many years, and c) the “Santa Claus rally.”
The S&P 500 index ($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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