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Lawrence G. McMillan

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March 12, 2021, 4:06 p.m. EST

The stock market is behaving in mysterious ways — is it bullish, bearish or something else?

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By Lawrence G. McMillan

The stock market is doing something unusual, especially in these volatile times: It’s being led by the “old” and “stodgy” stocks of the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.38% .

The Dow has hit record highs for three days, up about 1,400 points in the past four trading days to over 32,000.  No other major index has followed along, although the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.04% and the Russell 2000 /zigman2/quotes/210598147/delayed RUT -0.78% are not far away from new all-time highs of their own.  The Nasdaq /zigman2/quotes/210598365/realtime COMP -1.59% is lagging. 

So, is this bullish, bearish or indifferent? It probably depends on the situation, but there is an old saying that when the generals are leading the advance, it’s not a good sign for the stock market. 

That saying refers to a time when General Electric /zigman2/quotes/208495069/composite GE -2.36% , General Motors /zigman2/quotes/205226835/composite GM -0.89% and other “generals” were the mainstays of the Dow, so you can see how old it is.  It is really just a way of saying that when the majority of stocks are weakening and not making new highs, it’s not a good sign when only 30 stocks are leading the way. 

Institutional investors pile into stocks

We have different (hopefully better) ways of measuring divergence these days — specifically, cumulative breadth indicators, new highs vs. new lows, etc., so we don’t have to “stretch” to draw a conclusion about the Dow today. 

I will say that the buyers of these Dow stocks are not the Robinhood crowd but are the “big boys” — institutional investors — and they are piling in like mad.

In any case, we usually use the S&P 500 as the measure of the broad stock market. The index is being dragged somewhat higher by the Dow stocks, as they are all big components of the S&P 500.  Even so, the S&P 500 continues to run into resistance in the same area: 3,870 to 3,950 points. 

A move above 3,950 — it’s close today — would be a new all-time high and bullish, requiring a “reset” of all the indicators.

Lacking that, the bears still have a chance to gain some leverage. It would not be surprising to see the S&P 500 remain in the broad trading range of 3,630 to 3,950.  There is also support within that range, in the 3,700-3,725 area, where the S&P 500 bottomed out in both late January and early March.  A move below 3,630 would be extremely bearish.

Volatility off the charts

Finally, it should be noted that intraday volatility has been very extreme in the past couple of weeks. The Market Insight segment of this newsletter has some views on that subject.

Equity-only put-call ratios are moving steadily higher and that puts them solidly on sell signals. Even so, they are still at very low levels on their charts, meaning that they are overbought. They are trying to work off this overbought condition, which will eventually lead to a healthier market. But they have plenty of room to move higher and will remain on these sell signals as long as they are rising.

Market breadth has improved tremendously over the past four trading days. At the market’s recent lows March 4, “stocks only” breadth had descended into a true oversold condition. Thus, the improvement in breadth this week has produced a solid buy signal. Both breadth oscillators are now back into modestly overbought territory (and on buy signals). The cumulative breadth indicators are improving but have not recovered enough to reach new all-time highs. 

New 52-week highs vs. new 52-week lows remains a bullish indicator. There was a close call about a week ago, when the NYSE data almost produced a sell signal. But it did not, and now the number of new lows on the NYSE has descended back into single digits, while the number of new highs is exploding on this rally. 

Volatility remains high, as VIX /zigman2/quotes/210598281/delayed VIX -2.14% continues to trade well above 20. The VIX “spike peak” buy signal of March 4 remains in place and will continue to do so until early April, unless it is stopped out by VIX spiking higher once again. VIX is back below its 200-day moving average. Also, the 20-day moving average is below the 200-day.  Thus, the trend of VIX remains downward, and that is bullish for stocks too. 

The construct of volatility derivatives has remained solidly bullish for some time. In the last couple of weeks, when other indicators were (are) weakening, this construct — along with the “new highs vs. new lows” indicator — remained the bulls’ best friend.

The April VIX futures are now trading with a large premium over the March VIX futures. As long as that remains the case, it is a bullish sign for stocks. The March futures expire next week — on March16 — so the “torch” will pass to April as the front month.

At that time, we will begin looking at the relationship between April and May futures. It is bullish as well, as May futures are trading about 1.50 over the price of April futures. The term structure of the CBOE Volatility Indices slopes upward, too.  All of these are currently bullish signs for stocks.

In summary, the S&P 500 is still running into resistance and, as long as that is the case, there is a chance that it’s still in its trading range and could retest the lows of the range. A breakout above 3,950 would be bullish (and likewise, a breakdown below 3,630 would be bearish).

Market Insight: Intraday volatility explodes

Over the past 12 trading days, intraday volatility has been extreme in the major averages. That is unusual in a market that is moving sideways or even up. Yes, in a bear market, such as we saw a year ago, extreme volatility is to be expected. But over these past 12 days, the S&P 500 is up 22 points — not much, but up nonetheless.

US : Dow Jones Global
-127.93 -0.38%
Volume: 0.00
Feb. 3, 2023 4:54p
-43.28 -1.04%
Volume: 0.00
Feb. 3, 2023 4:54p
US : US Composite
-15.69 -0.78%
Volume: 2.09M
Feb. 3, 2023 4:30p
US : Nasdaq
-193.86 -1.59%
Volume: 6.01B
Feb. 3, 2023 5:16p
$ 81.96
-1.98 -2.36%
Volume: 5.78M
Feb. 3, 2023 4:00p
P/E Ratio
Dividend Yield
Market Cap
$89.56 billion
Rev. per Employee
$ 41.13
-0.37 -0.89%
Volume: 18.57M
Feb. 3, 2023 4:00p
P/E Ratio
Dividend Yield
Market Cap
$57.36 billion
Rev. per Employee
US : Cboe Indices
-0.40 -2.14%
Volume: 0.00
Feb. 3, 2023 3:15p
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