OEX & SPX
Enviado: 22/2/2003 21:10McMillan Market Commentary 2/21/3
by Lawrence G. McMillan
Stock Market
While it's too early to say for sure, it looks like last Thursday's-to-
Tuesday rally was just an oversold bounce. Price action never turned
bullish, as far as $OEX and $SPX are concerned. They rallied right up
to their declining 20-day moving averages, and then turned down again
(Figure 1). By the way, have you noticed that nearly every day for a little
over two weeks, there is a late rally (after 3pm Eastern time)?
Supposedly this is because institutional traders make a decision in the
"morning meeting" to buy stocks, but don't actually want to buy them
until late in the day. Whether or not that tells the whole story, it is
probably true to some extent. In any case, we weren't convinced of
the bullish case and won't be until prices can at least close above their
20-day moving average and overcome at least one important resistance
level. They have done neither, so we remain long a modest position
in $OEX put bear spreads.
The equity-only put-call ratios remain bearish, as they have
continued to rise even while the market rallied earlier this week. Both
the "standard" and "weighted" ratios are at new interim highs as of
Thursday's trading (Figures 2 & 3). As long as these ratios keep rising, they
will be considered negative. It should be noted, however, that the
QQQ weighted ratio is on a buy signal. While we don't consider that
superior to the equity-only ratios, it is indicative of the fact that the
NASDAQ stocks appear to be outperforming again at the current time.
Finally, most of the new individual stock put-call ratio signals we've
seen in the last week have been buy signals. While that statistic is not
necessarily a buy signal, it does show that put buying is exhausting
itself in several issues now, such as American Express, Coca Cola,
Dell, and Kodak.
Market breadth is the most bullish indicator we see right
now. However, in the absence of other positive signals, we aren't
too anxious to take a broad market position based on these oscillator
buy signals.
Volatility is the final indicator we follow, as far as the broad
market goes. On the surface, $VIX is mildly bullish because it has not
broken out over the 40 level (Figure 4). In fact, the "other" volatility
index that we create -- one using stock options -- has made a peak and is
declining, so it is on a buy signal. However, there is perhaps a more
important way to look at volatility.
$VIX is near 40%, but actual, statistical volatility of $OEX is
close to 20%. Hence this is akin to the "event-driven straddle buy"
situation we often follow in pharmaceutical or biotech stocks waiting
for an FDA ruling on an important drug application. In the cases of
those stocks, the straddle buy is often profitable because -- even though
the options are expensive -- the stock moves more than traders expect,
once the news is finally released. Could the same thing happen to the
broad stock market after the Iraq war begins or doesn't happen? Bulls
will tell you that both scenarios are bullish -- the market will go up on
either war or peace. That is ridiculous, of course, for if that were the case, the market would have ALREADY gone up. No, the market is telling
us that something presents a downside risk here, too. So, the market
could explode in either direction if $VIX is correctly positioned at a
high volatility while actual volatility is low.
by Lawrence G. McMillan
Stock Market
While it's too early to say for sure, it looks like last Thursday's-to-
Tuesday rally was just an oversold bounce. Price action never turned
bullish, as far as $OEX and $SPX are concerned. They rallied right up
to their declining 20-day moving averages, and then turned down again
(Figure 1). By the way, have you noticed that nearly every day for a little
over two weeks, there is a late rally (after 3pm Eastern time)?
Supposedly this is because institutional traders make a decision in the
"morning meeting" to buy stocks, but don't actually want to buy them
until late in the day. Whether or not that tells the whole story, it is
probably true to some extent. In any case, we weren't convinced of
the bullish case and won't be until prices can at least close above their
20-day moving average and overcome at least one important resistance
level. They have done neither, so we remain long a modest position
in $OEX put bear spreads.
The equity-only put-call ratios remain bearish, as they have
continued to rise even while the market rallied earlier this week. Both
the "standard" and "weighted" ratios are at new interim highs as of
Thursday's trading (Figures 2 & 3). As long as these ratios keep rising, they
will be considered negative. It should be noted, however, that the
QQQ weighted ratio is on a buy signal. While we don't consider that
superior to the equity-only ratios, it is indicative of the fact that the
NASDAQ stocks appear to be outperforming again at the current time.
Finally, most of the new individual stock put-call ratio signals we've
seen in the last week have been buy signals. While that statistic is not
necessarily a buy signal, it does show that put buying is exhausting
itself in several issues now, such as American Express, Coca Cola,
Dell, and Kodak.
Market breadth is the most bullish indicator we see right
now. However, in the absence of other positive signals, we aren't
too anxious to take a broad market position based on these oscillator
buy signals.
Volatility is the final indicator we follow, as far as the broad
market goes. On the surface, $VIX is mildly bullish because it has not
broken out over the 40 level (Figure 4). In fact, the "other" volatility
index that we create -- one using stock options -- has made a peak and is
declining, so it is on a buy signal. However, there is perhaps a more
important way to look at volatility.
$VIX is near 40%, but actual, statistical volatility of $OEX is
close to 20%. Hence this is akin to the "event-driven straddle buy"
situation we often follow in pharmaceutical or biotech stocks waiting
for an FDA ruling on an important drug application. In the cases of
those stocks, the straddle buy is often profitable because -- even though
the options are expensive -- the stock moves more than traders expect,
once the news is finally released. Could the same thing happen to the
broad stock market after the Iraq war begins or doesn't happen? Bulls
will tell you that both scenarios are bullish -- the market will go up on
either war or peace. That is ridiculous, of course, for if that were the case, the market would have ALREADY gone up. No, the market is telling
us that something presents a downside risk here, too. So, the market
could explode in either direction if $VIX is correctly positioned at a
high volatility while actual volatility is low.