By Lawrence G. McMillan

The Standard & Poors 500 Index ($SPX) had been mired in the 2120-2160 area since it broke down on September 9th.  In the last two days, after the Fed predictably kept interest rates unchanged, $SPX rallied strongly and closed just under 2180. $SPX needs to close above resistance, at a new all-time high in order to confirm the budding bullishness that we are seeing.  Other indicators have turned bullish, but we have seen occasions before where $SPX did not confirm, and $SPX was eventually the correct indicator (how can it not be?).

The action of the last few days has rolled the standard equity-only put-call ratio over to a buy signal.  It is marked with a green “B” in Figure 2, because it is a new signal.  The weighted ratio (Figure 3) is still on a sell signal, however, as it continues to climb higher daily. 

Breadth is expanding, so last week's sell signals have been canceled out.  That places the breadth oscillators on buy signals once again, and they are in modestly overbought territory. Cumulative “stocks only” and NYSE breadth totals made new all-time highs today.  That is a bullish divergence that we haven’t seen in a long time: breadth leading the market, rather than the other way around.  

$VIX has closed below 15, it is no longer in a bearish state for stocks.  In fact, it traded below 12 Yesterday.  Since it is at a low level, it is back within a rather wide trading range from 11 to 15.  As long as $VIX remains in that range, stocks can rise.

In summary, the Fed’s announcement was less a catalyst than it was a concern that didn’t materialize.  Prices are rallying and the indicators are turning bullish.  It is still going to be necessary to see $SPX confirm this bullishness by moving to a new all-time high.  In the unlikely event this all falls apart, and $SPX closes below 2120, that would be very bearish. 

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.