Betting on Bulls--for Awhile

12/01/2006 12:00 am EST

Focus:

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Evaluating the stock market from current, near-, as well as long-term perspectives, Lawrence McMillan reviews recent market activities and highlights the science and rationale behind his short-term bearish and intermediate-term bullish expectations…

“For the first time since early August, the market recently attempted a downside correction. It was a feeble short-lived attempt. $SPX found support from the technical support level at 1360 as well as from the bottom of the trading channel that it has been in since July.

“The 20-day moving average was penetrated, but that was apparently irrelevant. The correction began just after $SPX had risen so far that it probed out of the upper end of the channel. The support at the bottom of the channel held. If $SPX ever declines below the bottom of the channel, some frenzied selling will probably take place. So, it seems to be that if $SPX trades out of the channel--either on the upside or the downside--the market can be sold. Otherwise, the intermediate-term bullish pattern dominates.

“The steadiest indicator has been the equity-only put-call ratio. Both the weighted and standard ratios continue to make new lows, which means they are on buy signals. Moreover, they are not that low on their charts, so they could have a good deal more room to run. QQQQ weighted put-call ratio remains on a buy signal, as it has since August, but has reached the lower regions of the chart and is thus getting overbought.

“Market breadth was the only indicator that gave an actual sell signal during the recent correction. However, at major turning points, breadth is more of a confirming indicator rather than a leading one, so we did not give those sell signals a lot of credence. During the correction, breadth never got oversold enough to generate true buy signals, although there were a couple of seriously negative days. Currently, the breadth oscillators are back into overbought territory, albeit modestly so. Therefore, as soon as declines outnumber advances for a couple of days, they will likely fall back into sell signals again.

“The volatility indices ($VIX and $VXO) remain at extremely low levels. $VIX held at 11 or slightly above until the election and then fell to the 10.60 level. They are extremely overbought. However, the market can continue to advance as long as $VIX remains low. We would become worried if $VIX (as well as actual volatility) began to rise. Until then, they are not a hindrance to higher prices.

“We continue to remain intermediate-term bullish, while acknowledging that short-term overbought conditions might create sharp, but short-lived corrections.”

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