The pullback in stocks over this past week closed the third and final gap of the Oct 10-12 buying spree, and the S&P 500 (SPX) came all the way back down to the breakout level of 3425-3430, asserts Larry McMillan of Option Strategist.
It has bounced off there for now, and so this might merely be a sort of classic pullback to test support and then move higher. As long as SPX remains above 3400, its chart has a bullish slant to it.
Equity-only put-call ratios continue to move lower, despite the market's selloff in the past ten days. Hence, they are on buy signals, albeit in rather deeply overbought territory.
Strong breadth had been one of the underpinnings of the rally from September 23 to October 12. However, breadth was poor enough on the ensuing decline that both breadth oscillators rolled back over to sell signals—briefly, as it turns out in the case of the "stocks only" breadth oscillator, which has already canceled out that sell signal after a positive breadth day on October 22.
This brings us to volatility, which is preoccupied with post-election option pricing, and as a result, is not acting as its usual barometer for the broad stock market. CBOE SPX Volatility Index (VIX) continues to remain high—just below 30. It would certainly not be this elevated without the election pricing.
Is the election going to be a big deal or not? In some ways, this whole anticipation reminds me of Y2K—a lot of hype, but not much substance once the event actually arrived. It could play out that way. There are some who are predicting a volatility implosion after the election that will spur a large stock market rally as hedges are unwound. We shall see.
So, the market remains in a bullish state as long as SPX continues to close above 3400. We continue to monitor for trades within or systems and will take them when they are confirmed buy or sell.
To learn more about Larry McMillan, visit Option Strategist
