If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Market's Record Run Will Continue
05/29/2007 12:00 am EST
Lawrence McMillan, editor of the Option Strategist, says most of the technical signs are still very favorable, and he looks for the Standard & Poor's 500 to hit new records soon.
This market just keeps rolling along, like "Ol' Man River." We have stated several times that it has the appearance of underinvested traders (or shorts) trying to catch up to this juggernaut.
It's hard to imagine that the short-lived but very sharp decline at the end of February scared so many people out of their long [positions]—but it apparently did. And to this date, many of them haven't gotten completely back in yet. Of course, about the time they do, the party will be over—but that's a subject for a later date.
The Standard & Poor's 500 ($SPX) has now made new six-plus year highs again. It certainly seems to have its sight set on two targets: the closing high of 1527 and its all-time intraday high of 1552—both set on the same day back in 2000. We expect those to be exceeded shortly.
As long as $SPX remains above its upward sloping trend line, the bullish case is intact. That trend line is currently at 1500. The equity-only put-call ratios continue to be bullish. They have fallen rather sharply since their precise buy signals at the beginning of April, and now they are near the bottom of their charts. I suppose we could say they're overbought at those levels, but we wouldn't venture beyond that. Just because recent sell signals occurred at about these levels on the put-call chart doesn't mean that the next one will. No, they will only turn bearish if they roll over and begin to trend higher.
Market breadth has been the least bullish indicator, continuing a pattern that has existed for nearly a year now. In fact, both breadth oscillators recently gave sell signals, although we did not act upon them. We view the breadth oscillators as confirming signals at best, and would not act on them alone. But perhaps the fact that breadth was so weak even though $SPX and the Dow kept on plodding higher means that an internal correction took place.
The negative breadth readings certainly alleviated the overbought conditions that had existed a few weeks ago, and perhaps the entire market has likewise been relieved of being overbought. If so, that's a bullish interpretation of the action in breadth.
Finally, the volatility indices ($VIX and $VXO) have edged higher, nearing the 14 level at times. This is not really bearish. In fact, it may just be a sign that the overall market is going to be more volatile, even while the market is rising. This last happened in the late 1990s.
In summary, we remain bullish. Except for the occasional weak sell signal from breadth, none of our indicators has even remotely seemed bearish. We will respect that and continue to ride the trend.
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