What a difference a week makes. Just one week ago, the S&P 500 (SPX) had sold off sharply, but then the bulls said "enough," asserts Larry McMillan of Option Strategist. 

Institutional cash, which is often deployed heavily at the end of January and the beginning of February, came rushing into the market. In just four trading days, SPX had recovered all of the losses and had closed at a new all-time high. SPX bottomed out almost right at 3700 on Friday, January 29, so that is definitely support. There is also support below that, at 3630. That is the one that I consider more important, because a breach of that level would take the market below its December lows, usually the sign of an emerging bear market.

Equity-only put-call ratios are exhibiting some unusual behavior: the two ratios are diverging. The standard ratio (Figure 2) is plunging to new lows and is thus on a buy signal. The weighted ratio is slowly rising and is thus somewhat bearish.

Breadth improved greatly this week. The breadth oscillators are once again in overbought territory, which stopped out the sell signals of a week ago.

Volatility has been very reactive to recent market movements. When SPX had its (what turned out to be) mild selloff last week, CBOE SPX Volatility Index (VIX) exploded from 21 to 37. Then it gave a new VIX "spike peak" buy signal at the close of trading on January 28, and it has since imploded all the way back down to 22.

MoneyShow’s Top 100 Stocks for 2021

The top performing newsletter advisors and analyst are back, and they just released their best stock ideas for 2021. Subscribe to our free daily newsletter, Top Pros' Top Picks, and be among the first wave of investors to see our best stock ideas for the new year.

So, the stock market has regained its upward momentum, and bullish positions should be maintained because of that. In addition, modest bearish positions can be taken if confirmed sell signals emerge, but don't go overboard with the bearish trades unless SPX breaks support.

spx

21 day

put call

vix

To learn more about Larry McMillan, visit Option Strategist.