Larry's latest, still on a buy signal, but overbought.:
i'm adding to my short position today to bring it up to 50%
luc hasn't taunted us in almost a week -ng-
The Option Strategist HOTLINE
Thursday, November 15th, 2001
Nothing much seems to bother this market. Today it was the bond market that
could have caused problems, but didn't in the end. Bonds suffered one of their
worst single-day declines in history, and apparently Crude Oil was to blame.
The thinking is rather circuitous, but it goes like this: since Crude Oil was
down so much, that's positive for the economy (lower cost of fuel), and if the
economy is going to be okay, then the Fed won't have to lower rates any more,
and that's bad for bonds. Got it? That sort of thinking may have started the
bond action, but what happened late in the day was a full-blown panic as traders
saw bonds profits turning into losses and panicked to get out.
Usually, action of this kind would prove troublesome for the stock market
if only for a day or two. But not this market. It did decline a little in
the afternoon but then came racing back near the close as it has done all week.
So, the bullish trend continues, although overbought conditions are getting
more extreme. One wonders if the stock market gets too overbought, will it
suffer a fate similar to the bond market some day in the near future? A day
where everyone tries to nail down their profits (or get out the exit, if you
prefer) all at once.
Looking at our indicators, the equity-only put-call ratios continue to move
lower. That is bullish. The weighted equity-only ratio is at its lowest levels
in over a year. Thus this indicator can be considered to be "overbought." If
we're still in a bear market, this put-call ratio is certainly down to levels
from which sell signals would arise. However, if we're transforming to a bull
market, this ratio could go quite a bit lower before rolling over and beginning
to rise. Fortunately, we don't have to put a label on this market. All we really
have to do is watch the put-call ratio. Until it begins to rise, the market
will remain on a buy signal.
Other put-call ratios aren't quite as clearcut as the equity-only ratios
are. The S&P 500 futures option ratio has swung back to a buy signal. Another
group of three ($OEX weighted, QQQ weighted, and S&P 500 futures option weighted)
had registered sell signals a week or so ago, but those signals are now more
in question since the ratios have flattened out. Finally, the NASDAQ-100 ($NDX)
weighted ratio is on a sell signal.
Market breadth has been quite strong, too. That puts it into overbought
territory, but it can remain there for a while without actually generating a
sell signal. So, while breadth is "overbought," that alone does not mean it
is saying "sell."
This latest rally has pushed $OEX up to and just slightly above the long-term
downtrend line of this bear market. That's another "plus" for a longer-term
bullish argument. Of course, it did a similar thing last May and then it went
lower, so this movement while encouraging does not necessarily signal an
end to the bear market.
Finally, the last indicator that we look at for the purposes of broad market
prediction is implied volatility. The most common measure, the CBOE's Volatility
Index ($VIX), continues to decline,
albeit slowly. A declining $VIX is bullish for the overall market. So,
the overwhelming evidence is still bullish. Of course, the emerging overbought
conditions can't be ignored. But for now they're just "alerts," not sell signals.
Often, new bull markets make their biggest gains in the early stages while the
indicators are overbought. To deem them a sell signal or even to stand aside
at such times is not the best strategy. Of course, should the sell signals confirm
themselves, we would change to a bearish posture. |
