MORRISTOWN, N.J. (MarketWatch) — Despite the fact that the news media and fundamentalists can’t seem to find any reason to like this market, it refuses to sell off. In fact, as we head into the last holiday of summer, the market is poised near four-year highs.
For quite some time now (perhaps since last November), we have been pointing out how the voracious appetite for volatility protection has had the effect of distorting the term structure of the $VIX futures. Recently, though, this activity has branched out in a way that is only rarely seen in the markets: in short, large institutional traders are both buying stocks and buying volatility ETNs (thus, by inference, they are buying $VIX futures).
For most of the last two weeks, the Standard & Poors 500 Index ($SPX) plowed ahead, finally making new post-2008 highs this past Tuesday. Our intermediate-term indicators have been bullish for over two months now, so these new highs were in line with those indicators. However, as soon as the new highs were made, $SPX began to retreat, and an overbought correction now appears to be underway.
This market is becoming the ultimate in defying bearish opinion. Since June 1st, $SPX has advanced almost exactly 150 points and is nearly back to the yearly highs -- and therefore at a post-2008 high. Yet, bearish opinion is still rather rampant.
$SPX remains within the rising trading channel that extends back to early June (see Figure 1). It is near the top of the channel, so in that sense, it is "overbought."
Equity-only put-call ratios continue to remain on buy signals.
The stock market, as measured by the Standard and Poor’s 500 Index continues to rise (albeit very slowly of late). Even though the rise is slow, the fact that there has not been a correction in some time has led to some overbought conditions. SPX has not had a significant down day since Aug. 2. Thus, the odds of an overbought-induced short-term correction have increased.
(Barron's) - This bull market is rather unpopular—and that's good.
Since the rally began in early June, most investors and traders have doubted the advance because they were so afraid of Europe's debt crisis, U.S. economic problems, and even the U.S. presidential election.
In a continuation of the irregular series, explaining our analytical techniques, we are going to discuss how we interpret put-call ratio charts. This series began two issues ago with an article on naked put selling. Future articles in this series will encompass other aspects of position selection: calendar spreads, volatility skew-based trades, ratio spreads, and so forth.
Stocks have rallied to the top of the bullish $SPX channel (see chart, Figure 1). The top of the channel is at about 1410 currently, and the yearly highs are at 1420. So, that area is likely to provide some resistance for now.
Meanwhile, equity-only put-call ratios remain bullish.
Market breadth indicators are on buy signals, having reversed negative signals from the previous week.
Bears are having trouble understanding why the stock market continues to rise, but in reality it’s due in part to the fact that there are still too many bears. Many of the people who would be sellers have already sold and are now sitting back waiting for the market to go down. That strategy rarely works.