Weekly Stock Market Commentary 2/3/17

By Lawrence G. McMillan

Stocks sold off sharply this week -- the first decline of any note since early last December. This one may have some sticking power, though, as rally attempts failed all week, and then when support was broken on Friday morning, a rout was on.

I am fairly certain that support at 2680-2700 will prove to be useful, but there isn't much support above that. The $SPX chart will remain positive unless the 20-day moving average rolls over and begins to decline. As you can see in Figure 1, it is still rising with a small slope.

From the looks of the two equity-only put-call ratio charts, in Figures 2 and 3, you can see that finally the ratios have swung sharply higher. This puts them both on sell signals.

Market breadth has been poor, but that's nothing new. Both breadth oscillators rolled over to sell signals early in the week. Then Friday's crushing negative breadth has pushed both breadth oscillators into deeply oversold territory. That is the precursor to a buy signal, eventually.

Volatility has turned negative, since it is rising. $VIX closed above 13 last Monday and held that level. It now has closed above the 17 level. Figure 4 is a 2-year chart of $VIX, which is what's required to see the last time $VIX closed above 17 -- not since before President Trump was elected. Not only has $VIX closed above 13, which we have been saying for a long time would be a negative signal, but there is an uptrend in $VIX (blue line on the chart in Figure 4). So long as $VIX continues to rise, that's going to be a problem for stocks.

In summary, there are a number of negative factors at work in the market right now, and a very sharp, but possibly short-term correction is at hand. But there are some buy signals setting up, too -- just not immediately. From this grouping, it seems possible that a further short-term decline could materialize, but the intermediate-term trend is still positive.

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

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