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The Path of Least Resistance Is Up

04/19/2007 12:00 am EST


Lawrence McMillan

Founder & President, McMillan Analysis Corporation

Lawrence McMillan, editor and publisher of The Option Strategist, says stocks will continue to move higher, climbing a wall of worry and skepticism.

Last month's sharp selloff is still having some lingering effects on the stock market. Namely, a lot of people turned bearish at that time and still haven't turned back to bullish yet.

As long as they remain skeptical, we think this market will continue to rise. It will only be when they convert back to bullishness that the market will be in danger. The Standard & Poor's 500 ($SPX) has now carved out a nice pattern of higher highs and higher lows on its chart. The trend line connecting those lows is at about 1430, and that should represent short-term support for the index. Major support is below that, at 1410.

We expect the index to challenge its recovery highs at 1460. The $SPX chart is bullish, and a breakout above 1460 would likely bring a flood of money back into the market. (The S&P closed at 1471.48 on Tuesday.)

Equity-only put-call ratios have continued to fall since giving buy signals just two weeks ago. There are intermediate-term indicators, and they are strongly bullish currently. Once they develop this kind of momentum, they generally don't turn around quickly, so we look for them to be correctly bullish for some time to come.

Market breadth continues to oscillate with the market. It had reached heavily oversold levels when the market rallied for eight straight days. One day of decline alleviated that, but we are not getting any convincing signal from breadth right now, as it continues to be a confirming indicator at best (rather than a leading one).

Finally, the volatility indices continue to be in down trends, which is also bullish. If $VIX were to close above 15, that would penetrate the trend line. Furthermore, the volatility futures and options are showing a bullish construct as well. What that means is that the volatility (VIX) futures are all trading at premiums to $VIX itself, and each longer-term future has been trading at a successively higher price than its predecessor.

In summary, we have no sell signals from our indicators, and with the $SPX chart and the put-call ratios being quite bullish, we look for higher prices to prevail. There is always geopolitical risk and the risk that "too much" bullishness will occur again. But for now, there are seemingly plenty of doubters, and so we think the market will move higher.

This is one of those markets where the $SPX chart is one of the best indicators, so that is the main thing to watch now. As long as its up trend remains intact, the bears really don't have a case.

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