Join Lawrence McMillan LIVE at The MoneyShow Orlando!

Join Lawrence McMillan LIVE at The MoneyShow Orlando!

Not Bullish Yet

09/22/2008 12:00 am EST


Lawrence McMillan

Founder & President, McMillan Analysis Corporation

Lawrence McMillan, editor of The Option Strategist, says the S&P 500 will have to move higher before he turns bullish.

It is typical of this market to generate overbought and oversold extremes quickly. Thus, when the government introduced their nationalization plan for Fannie Mae and Freddie Mac, it combined with an oversold condition to produce a volatile 50-point rally in the Standard & Poor’s 500 ($SPX), culminating with $SPX spiking up on Monday morning.

From there, the bears took control again and pushed the market sharply lower. [As of last week,] the $SPX chart had taken on a negative tone. As long as that is the case, the $SPX chart will be bearish, in our opinion. That opinion would only change if $SPX exceeds recent highs in the 1275-1280 neighborhood. (After Thursday and Friday’s rally, it closed at 1255—Editor.)

As an aside, note that the $SPX rally that has occurred since the July lows has been rather anemic. Considering that oversold conditions of historic proportions were generated at those July lows, it’s almost pathetic how weak the ensuing rally was. Much larger rallies occurred after the oversold bottoms last August and this past March.

Either way, those lows eventually gave way, and we expect the same fate to befall the July lows as well. (That happened last week before the government’s massive bailout of the financial system was announced—Editor.)

Market breadth reflects the schizophrenic nature of this market as well as anything. There are both huge positive and negative breadth days—sometimes contiguous to each other. Selling was so heavy [a couple of weeks ago] that “90% down days” were generated by the “stocks only” data on both occasions. (New York Stock Exchange-based data, which rarely registers a true “90% down day,” generated “90% down volume days” on both occasions, as well.)

As you know, 90% down days are bullish for a short-term rally and, in both cases, the market obliged two days later. We have also noticed that these “90% down days” have been appearing in clusters in this ongoing bear market. There were three in January and three again in March (with others sprinkled around as well). So, another may be in the offing soon.

As far as the breadth oscillators go, both reached oversold levels [a week ago]. The NYSE-based oscillator has moved to a buy signal, and the “stocks only” is not far from it. The volatility indices ($VIX and $VXO) have steadily moved higher, not dropping much on the days that the market rallies. As a result, they are in bearish up trends. Like the put-call ratios, these will be bearish as long as they continue to climb on their charts.

In summary, we remain bearish, despite the breadth buy signals. Sharp, but short-lived oversold rallies are rampant—typical bear market action. But we will retain a negative view unless $SPX closes above resistance.

Subscribe to The Option Strategist here…
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on OPTIONS