Caution Still Warranted For S&P 500 (SPY)

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April 21, 2018 8:02am NYSE:SPY

Image of caution tape

From Larry McMillan: In some ways, the market has recently shown a good deal of strength. But in other ways, it has to do more to overcome the intermediate-term bearish trend that still exists.


This week, S&P 500 (SPX) finally broke upward out of the “box” that had been containing prices since March 26th (marked in red in Figure 1).

spx1

However, the real test will come at 2750. If the rally can’t break out above there, the $SPX chart will still be in a bearish downtrend.

Both equity-only put-call ratios are now on confirmed buy signals this week. The weighted signal is coming from a very oversold condition, but the same thing happened in early March, and the market tanked anyway.

spx2

spx3

Market breadth has improved a lot in the last few weeks. Both of the cumulative advance-decline lines made new all-time highs as of Wednesday’s close (April 18th). This is shocking! The market certainly doesn’t feel like that good all, but the evidence is irrefutable. Before you get too excited, the same thing happened in mid-March, and the market declined anyway. So this is hardly a strong signal for short-term price action.

$VIX is low and thus not a problem for stocks at the current time. But the term structure is not all that wonderful, even though it’s sloping slightly upward. The reason that I’m not sounding more positive about this is that every time the market sells off a little bit, the term structure begins to flatten right away. It feels like it could easily invert, and that would be a negative sign for stocks.

spx4

In summary, in the short term, we have an upside breakout from the “box” on the $SPX chart, plus there are buy signals from both put-call ratios, both breadth oscillators, and a couple of other indicators. What could possibly go wrong? I don’t know, but I do know that unless $SPX can close above 2750, the $SPX chart will still be in a downtrend, so treat any rallies with caution.


The SPDR S&P 500 ETF Trust (SPY) closed at $266.61 on Friday, down $-2.28 (-0.85%). Year-to-date, SPY has declined -0.09%.

SPY currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 145 ETFs in the Large Cap Blend ETFs category.


This article is brought to you courtesy of McMillan Analysis Corp..


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