Stocks Still Bullish Despite Overbought Signals
The S&P 500 Index (SPX) has been on an impressive rally, reaching new all-time highs this week, and seasoned traders know what that signals—opportunity! Yes, we’re recognizing that stocks are currently pricey and incredibly popular, but as any savvy trend-following trader understands, overbought doesn’t equate to an automatic signal to sell. December is historically characterized by seasonally bullish trends like the ‘Santa Claus Rally’ and the ‘January Effect,’ making this an exciting time to maintain a core bullish position.
Chart Analysis
Looking at the SPX chart, it’s clear that there is still bullish momentum. The first line of support is at 6,010, which was previously a resistance level. Below that lies a stronger support level at 5,870. A break below 5,870 would raise alarm bells, while a deeper plunge beneath 5,670 would signal a potentially severe downturn. However, in the short-term outlook, we’re not anticipating these scenarios becoming a reality.
What’s particularly compelling right now is that there’s no defined resistance since the SPX is at new highs. Our primary target rests on the +4
Internal Market Indicators
Diving into internal indicators reveals some fascinating insights. Currently, the equity-only put-call ratios have dipped to lows not seen this year, marking an overbought condition. That said, these ratios are continuing to decline, indicating bullish sentiment for stocks, as opposed to the upward trend seen in late 2021, just before the last bear market. Until we see these ratios start to rise steadily, we remain in a bullish state, despite being overbought.
However, caution is warranted as market breadth has lagged behind the overall bullish trend. This week, as the SPX was climbing, we saw negative breadth on two separate occasions. On December 4, despite reaching new highs, breadth was barely positive. The NYSE breadth oscillator has signaled a sell, while the stocks-only breadth oscillator has yet to follow suit. If both indicators do generate sell signals, it may warrant a trading decision.
VIX Analysis
Now, let’s talk volatility. The VIX is hovering just above 13, nearing its yearly lows, and fits into that overbought category once again. The “spike peak” buy signal generated on November 6 will persist through December 9, demanding our attention. Notably, a new buy signal has emerged with the 20-day moving average of VIX crossing below its 200-day moving average—a crucial shift. In the past year, this crossover has preceded positive market conditions, suggesting that while VIX might not be trending lower, the stock market often benefits during such structures.
Seasonal Trends
As we wrap up our analysis, it’s important to acknowledge the seasonally bullish trends unfolding around us. The post-Thanksgiving rally has set the stage, and we’re on the brink of entering the “January Effect,” typically celebrated in December this year. Keep in mind that we also anticipate the “Santa Claus Rally” toward the end of this month, which historically provides traders with additional bullish momentum.
Conclusion: Positioning for Profit
To sum it up, our core bullish position remains intact. We’ll continue to search for additional confirmed signals as opportunities arise, and in the meantime, we’ll be rolling deeply in-the-money calls up—to both lock in profits and mitigate risk. The momentum is strong, and while we are mindful of the overbought indicators, history suggests that the market can maintain its bullish posture for an extended period. So buckle up, fellow traders; there’s still plenty of room for growth ahead!