But what’s more concerning is that we are now seeing confirmed sell signals from breadth and from equity-only put-call ratios. More about that in a minute.
SPX has support at last week’s lows, at 4630. Below there, support also exists at the previous highs, 4525-4550. A close below 4630 would not only be a violation of support, but it would also confirm a McMillan Volatility Band (MVB) sell signal.
Right now, a “classic” modified Bollinger Band (mBB) sell signal is in effect, but we require further confirmation for the MVB sell signal. That “classic” sell signal would be stopped out by an SPX close above the +4σ Band, which would occur today on a close above 4730. That “stop out” was more realistic a couple of days ago, when it was lower, but that did not occur.
Also, realized volatility has fallen dramatically, and the S&P’s 20-day historical volatility (HV20) is down to 7%. That is quite low. In a broad sense, it indicates that the market is “overbought” and is wound tightly so that it might explode. An HV20 sell signal would occur if it rises to 11% or higher. Again, that does not seem imminent.
In something of a surprise, the equity-only put-call ratios have both rolled over to sell signals as of the close of trading on Nov. 17. On the accompanying charts, I have marked these with a “S?” to indicate that it is computer analysis making this call, and it is not necessarily obvious to the naked eye.
Sell signals occur when the ratios bottom out (make a local minimum) and begin to rise. The computer analysis – which knows, among other things, what is coming off the 21-day moving average – is “convinced” that the rise has begun.
Breadth has deteriorated over the past few days as well. As a result, both of our breadth oscillators are on sell signals, and are dropping rapidly.
This is the shortest-term of our indicators. These signals can reverse quickly, but the last breadth oscillator buy signals were in place for quite a long time (from Sept. 22 until about a week ago) and were quite successful.
Cumulative breadth measures have not made new all-time highs, as might be expected.
New 52-week highs have continued to outnumber new 52-week lows, but that differential is shrinking in terms of NYSE data. In terms of “stocks only” and NASDAQ data, it has already turned negative. A sell signal would occur here if NYSE new lows outnumber new highs and there are least 100 of the new lows.
So, many of the above indicators are turning negative. The implied volatility complex is not experiencing any such negativity. VIX
is remaining relatively subdued (although it still won’t break below 15), and thus its 20-day moving average remains below the 200-day MA. That keeps the definition of the trend of VIX downward, and a down-trending VIX is bullish for stocks.
Furthermore, the construct of volatility derivatives remains bullish for stocks. The December VIX futures are now the front month, so we are interested in the relationship between December and January. As long as December is trading at a lower price than January (which it currently is by a rather large 2.00+ points), that is bullish for stocks. The terms structures of both the VIX futures and of the CBOE Volatility Indices slope upward, and that is positive for the stock market as well.
In summary, the S&P chart is still positive as long as SPX continues to remain above 4630, so we are recommending a “core” long position because of that (and because of the positive signals…
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