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Stocks were ripping higher, as the rally that began in early October just kept gathering momentum. Last year began with an extremely strong rally, went into a sideways consolidation from May through October, and then blasted higher again. This is somewhat in line with pst years ending in “9” as well as with 2017.
But then a roadblock appeared in the form of military intervention in Iraq. That has produced some selling over the past two days, but it has been relatively modest and has not changed the internals of this strong market.
Read: Who was Qassem Soleimani, and why is his death a major development in U.S.-Middle East relations?
The strength of the stock market can be seen from the many gaps on the rising chart of the S&P 500 index SPX, +0.35%. I’ve circled three of them in the accompanying chart (red circles). Usually, gaps do not last for any length of time on a broad market index like the S&P, but they certainly have recently.
There is support on the chart at the various horizontal red lines on the chart. I wouldn’t classify many of those support lines as major support, though, because they were formed on a mere pullback for a day or two before the market blasted higher again. The strongest of these near support levels is 3,215-3,220. The only one that might be considered a “tested” support area is 3,070. Below that, 3,025-3,030 is a more “tested” area as well. But we have advanced so far and so swiftly that it would take a nearly 200-point decline to reach those support levels.
Thus the S&P chart is certainly still bullish, as it is trending higher along with nearly every moving average and other technical trend following indicator that you can name.
Since breaking above its 20-day moving average on Oct. 11, it has closed below that moving average on just one trading day in early December. The one negative is that the “modified Bollinger Bands” (mBB) have generated a sell signal as of Friday’s close.
Of course, the two most recent mBB sell signals were stopped out for losses, after they occurred back-to-back in late November and very early December. Since then, the S&P has managed to crawl its way higher while remaining above the +3sigmaσ Band — and even the +4sigmaσ Band, for the most part.
Read: What stock market investors need to know about intensifying U.S.-Iran tensions
Equity-only put-call ratios are at extremely low levels, due to heavy call buying during most of the recent three-month stock market rally. Even the selling of that past two days has not had much effect on these ratios. Both have reached low levels not seen since early 2018, before the market eventually tanked in February 2018. The computer analysis programs, however, are not even grading these as “sell,” despite their low levels. Regardless, these ratios are not far from turning and trending higher; when they do, that will be the confirmed sell signal. Until then, they are overbought but not on sell signals.
Market breadth has been modestly strong — enough to keep the breadth oscillators on buy signals. On both Friday and Monday, January, breadth started out the day extremely negative, and it seemed as if that might enough to roll these breadth oscillators over to sell signals. But on both days, the market rallied back, and breadth improved.
One would have thought that breadth would be stronger during a massive rally such as we’ve seen in the S&P 500 since early October. But that has seemed to be a hallmark of breadth all during the Trump administration, for some reason. Even though stocks have rallied a lot since President Trump was elected in 2016, breadth has not been great, just good. One or two strong days of negative breadth would generate sell signals from these breadth oscillators.
Cumulative advance-declines have been making new all-time highs routinely. That is no guarantee that stocks will continue to rise, of course. All it means is that there is not a negative divergence from this indicator at the current time.
New highs continue to dominate new lows. In fact, two of the most dominant days in recent memory have come in the past week. Thus, this indicator is strongly bullish, too, and is not giving any negative early warning signs.
Volatility has remained in the bullish camp as well. The VIX “spike peak” buy signal of Dec. 4 is “expiring” on Tuesday (that is, the trading system we have built around VIX “spike peaks” directs that winning trades be exited after 22 trading days). 2019 was another good year for “spike peak” buy signals, as are most years.
On a longer-term basis, VIX VIX, -1.21% has recently probed up to and touched its 200-day Moving Average (currently at about 15 and trading sideways) but has fallen back each time. Again, this was true during the heavy selling over the past two days, but both times VIX fell back sharply during the day. But we remain wary of a rise in VIX, and a close above 16 would be cause for a stock market sell signal.
Another warning sign when the market sells off is the tendency of near-term volatility derivatives to price above longer-term ones — i.e., an inversion in the term structure. That has not occurred either. Moreover, the VIX futures are still trading at premiums to VIX. So, the construct of volatility derivatives continues to remain bullish.
In summary, the market is nervous, mainly because it has advanced so far in the last three months. However, the recent selling was certainly modest, considering the number of overbought conditions that abound. One can trade bearish signals if they are confirmed (at the current time, there is only the one — “modified Bollinger Bands”), but the main outlook is still bullish. So retain a core long position, rolling call strikes up tightening stops where appropriate.
