Stocks May Be Pricey, but the Bull Market Isn’t Done Yet
The S&P 500 (SPX) is breaking records, reaching new heights yet again this week. While it’s essential to acknowledge that stock prices are climbing to levels that many would consider “overbought,” a strong Wall Street mantra rings true: “overbought does not mean sell.” Investors must recognize that even in an overbought condition, the market can continue to ascend for extended durations without any confirmed sell signals. Remaining vigilant and informed is key to navigating these fluctuations.
The Current Market Landscape
As it stands, the SPX chart remains predominantly positive, and our core bullish stance remains firm. While there are encouraging indicators, it is crucial to identify the potential pitfalls. The most recent support level is at 6,010, which previously served as a resistance point. A drop below this level could indicate trouble, but we see stronger support at 5,870. Should the index slip under this threshold, alarm bells should ring. A fall below 5,670 would present an exceptionally negative outlook, but we don’t foresee such scenarios in the short term.
At these all-time highs, we lack concrete resistance. The most prudent target remains the +4
Market Indicators: A Mixed Bag
While the bullish trend continues, investor sentiment is a mixed bag. The equity-only put-call ratios tell an interesting story, plunging to yearly lows, suggesting overbought conditions. However, unlike late 2021—when the last bear market commenced—these ratios continue to decline, providing bullish support for stocks. The turn upwards is critical for signaling any sell action, and for now, that’s not on the horizon.
Market breadth, however, raises some flags. On multiple occasions these past days, while the SPX was advancing, market breadth failed to follow suit, indicating that not all stocks are participating in this rally. Notably, the NYSE breadth oscillator has generated a sell signal, even as the “stocks only” breadth oscillator remains buoyant. If both sell signals come to fruition, it will signal a more significant shift in the market’s dynamics.
Volatility: An Unexpected Ally
Turning the gaze toward the VIX, we notice it hovering just above 13, nearing yearly lows—another sign of overbought status. However, the “spike peak” buy signal from November is still active until December 9, allowing us to hold our positions. Notably, another trend buy signal from VIX has emerged. When the 20-day moving average crossed below the 200-day moving average, it underscored the bullish sentiment in the market. This pattern is visible in previous years, showcased by previous buy signals, suggesting that while VIX may not be on a downward trajectory, the market generally trends higher under such conditions.
Seasonally, we stand on the edge of a robust period for equities. Following the post-Thanksgiving rally, we approach the “January Effect” often recognized in December—solidifying our expectations for the “Santa Claus Rally” to manifest towards year-end.
The Derivative Landscape
The structure of volatility derivatives has embraced a bullish outlook once more. The term structures of both VIX futures and the Cboe volatility indices are now steeply inclined upwards, with VIX futures trading at remarkable premiums to VIX. This behavior further supports the bullish stance on equities as we close in on year-end trading.
Conclusion: Maintain a Bullish Stance
In summary, the road ahead looks promising, and we are resolutely maintaining our core bullish position while poised to add confirmed signals as they arise. It’s prudent to make strategic moves, particularly rolling deeply in-the-money calls to capture partial profits and mitigate downside risks. Investors who value traditional financial principles must not allow fleeting market conditions to cloud their judgment but should instead keep a steady hand on the wheel during these volatile times.
