Yesterday, the market saw two distinct “halves.” In the first half, the market rallied fairly well – once again trying to prove that there is no follow-through to big moves. In the second half, the FOMC minutes spooked traders, and prices fell sharply. $SPX penetrated well below the 2040 level, reaching 2034.49 intraday. But then, to once again prove that there is no follow-through, $SPX rallied into the close. So $SPX has not closed below 2047 in weeks.
This article was originally published in The Option Strategist Newsletter Volume 19, No. 10-11 on June 3, 2010.
In some of our recent hotlines and daily commentaries, we have referred to the total put-call ratio as something that can be useful when extreme selling occurs. It is not a sophisticated measure (as the equity-only is, for example), because it is merely the total of listed puts traded that day divided by the total of listed calls. This includes all volume on the option exchanges regulated by the SEC – CBOE, AMEX, ISE, BOX, PHLX, NYSE – but not any futures options traded on futures exchanges.
...Equity-only put-call ratios temporized yesterday, moving slightly sideways, but they remain on sell signals as they generally continue to be in an uptrend. An interesting piece of data has arisen on the Total put-call ratio, though: its 21-day moving average is now above 0.90. That is an oversold condition that is a predecessor to what is normally a very strong buy signal. The buy signal will occur if either a) the 21-day MA moves back below 0.90, or b) the 21-day MA makes a peak that lasts for 10 days.
Lawrence G. McMillan was recently a guest on senior MarketWatch columnist Chuck Jaffe's MoneyLife podcast on May 12 at 12:30 PM. Larry's interview was a part of the "Technical Difficulties" segment where he discussed the current state of the market. Listen to the interview below.
Recording Details
MoneyLife Interview
Wednesday, May 12th
12:30 PM Eastern Time
The Standard & Poors 500 Index ($SPX) bounced strongly off of support at 2040 last Friday. That level remains strong support, with resistance at 2110.
Equity-only put-call ratios rolled over to sell signals last week, and while there was some flirtation with a new buy signal by the standard ratio (Figure 2), both of these put-call ratios are back on sell signals once again.
Let’s discuss cumulative breadth for a moment. Cumulative breadth is merely the running total of daily advances minus declines.
Bulls took charge early yesterday and kept the upward pressure on all day long. The strength of the rally changed the status of several indicators as well. So the 2040 area is reinforced as the major support level of $SPX once again. The brief probe below that level, for a few cents and for a few minutes last Friday, was not enough to qualify as a break of that support level. It’s unclear if the bears are going to get another chance for that breakout anytime soon.
In this past weekend's Striking Price column in Barron's, Steve Sears noted that investment research goliath Morningstar recently created a new "options" investing category in their fund listings. Mr. Sears believes this new cateogry signifies that options have now become "part of the matinstream investment landscsape." With options trading volume alomost doubling in the last 10 years, we'd have to agree with Mr.
A "stealth" correction has been underway for a couple of weeks. Most people would be mildly surprised to realize that $SPX has fallen more than 60 points from its recent highs near 2110, just over two weeks ago. The decline has been steady and unspectacular, accompanied by few actual sell signals. In other words, it's been a minor correction so far.
$SPX continues to display support at 2040, but a violation of that level would be bearish.
It’s a bit hard to realize, because it’s happened so quietly, but $SPX has fallen more than 60 points from its highs of two weeks ago. It’s done this without causing panic, although some negativity has certainly arisen in our indicators. $SPX has still not taken out the important support level at 2040. If it does that, a more severe correction will unfold.
