Still Bullish…for Awhile

01/05/2007 12:00 am EST

Focus:

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Options ace Lawrence McMillan analyzes the near-term outlook for the markets, arriving at a bullish conclusion.for now. However, he advises investors to maintain a keen watch over market events as the bull is looking a little tired...

"Despite some negative signs that appeared just before Christmas, the stock market has continued to plow ahead. $SPX pulled back and touched the bottom of its bullish uptrending channel. That was as far as the pullback went, however, and a strong rally developed from there. So, once again--as it has done for the last six months--$SPX remains well entrenched in that channel. Until it falls below that support convincingly, we will retain a bullish attitude.

"The equity-only put-call ratios are our most bearish indicators at present, both rolling over to sell signals about two weeks ago. We will view the standard chart as bearish unless it falls to new yearly lows. The weighted chart remains much more solidly on a sell signal (we filter out obvious dividend arbitrage in the weighted data). At the current time, these reliable intermediate-term indicators are out of step with the market.

"That's unusual, but not unprecedented. Typically, the ratio rolls over and gets back in synch with the market. Market breadth was weak when the market was weak, and has been extraordinarily strong recently when the market has rallied, acting as a confirming indicator and not a leading one. "Stocks only" breadth is generally weaker than NYSE breadth, but both are now in overbought territory and thus any recent sell signals have been canceled.

"The Santa Claus rally has begun with a strong bullish move. This year it encompasses the four trading days of the last week of the month and the first two trading days of the following week. If the period is bullish--and it certainly looks like it's going to be this year--it merely confirms the seasonality of that time period, However, if the period is bearish, it can have implications for next year.

"In summary, the simplest approach is the best one for this market: as long as prices continue to climb, there is no reason to abandon the bullish bandwagon. Admittedly, the bandwagon has become very crowded (when was the last time you saw a bearish analyst on CNBC?), and that makes us nervous. So be sure to keep tightening your stops, because once the selling begins it will be furious as all the newbie bulls try to squeeze out the exit at the same time."

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