Stock market outlook switches to bullish as S&P 500 breaks through a barrier


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It appeared Sept. 23 that the bears had control of the stock market.

But they fumbled it badly.

Beginning with a modest oversold rally Sept. 24, the broader market has staged a strong advance — backed by some of the widest breadth in a while. Now the S&P 500 Index (SPX) has broken out over what had been resistance around 3,425-3,430 points. That has changed the S&P 500’s chart’s designation to “bullish” (in my opinion), and the next target is the all-time highs at 3,588. A reversal back below 3,400 could alter this bullish outlook, but that doesn’t appear likely.


Equity-only put-call ratios have rolled over, and so to the naked eye, this cancels out their recent sell signals. However, they are still on “sell,” according to the computer-analysis programs that we employ. The computer is using a statistical average, and by that measurement, there are still some very low numbers coming off the 21-day moving average.

There are even lower numbers coming on right now, as call buying has been huge over the past week or so. The problem is, we are not getting “average” readings, and until we do, the sell signals should be held in abeyance.

Video: Time to make tactical moves: advisor (Reuters)


Breadth, however, did set up buy signals. Breadth has been spectacular in this rally. First, the breadth oscillators turned to buy signals Sept. 28. Breadth had been oversold prior to that — the one area in which we did see an oversold condition. Now, those buy signals have expanded into overbought conditions. But “overbought” is a good thing when the S&P 500 is beginning a new leg higher, as it appears to be doing now.


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Moreover, the cumulative advance-decline volume line has made a new all-time high. That is a very bullish indicator and forecasts that the S&P 500 will follow. For this indicator we keep a daily running sum of “volume on advancing stocks minus volume on declining stocks.”

The cumulative advance-decline line (using issues, but not volume) has also made a new all-time high. That one is not a predictive indicator, but the fact that these breadth indicators are making new all-time highs is quite amazing, given that the S&P 500 is still well below its all-time highs.

New highs are dominating new lows by a wide margin once again, so this indicator is bullish as well.

Volatility continues to live in a world of its own — largely because of the election and the expected volatility that is going to occur afterward, if the election is contested. For the record, the VIX’s (VIX) “spike peak” buy signal expired and so nothing is in place in that regard. On the trend of VIX, it remains slightly below its 200-day moving average (MA), and the 20-day MA of VIX also remains slightly below the 200-day MA.

Those are normally bullish signs for the stock market, but as has been noted many times, the fact that VIX is staying in the mid-20s indicates that this is not a normal time for the index.

As for the construct of volatility derivatives, it is being heavily manipulated by the post-election options as well. VIX is a 30-day volatility measure (looking forward), and for the first time, both “strips” of S&P 500 options that are necessary to calculate VIX expire post-election. That has kept VIX elevated, even though the stock market is rallying — a seeming conundrum, but not really, when you understand what is happening.

October and November VIX futures are inflated as well, because their underlying S&P 500 options expire post-election too. In fact, Nov VIX futures are more expensive than October VIX futures, and those November VIX futures are based on S&P 500 options that expire Dec. 18. So that means traders are expecting post-election volatility to continue into late this year. They might not be correct, but that’s what they’re expecting — at least according to the pricing of these post-election options.

In summary, we have enough bullish signs — primarily the breakout over 3,430 and the strong breadth readings — that we have changed our short-term outlook to bullish. As long as the S&P 500 remains above 3,400, that outlook will remain in place.

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