We used the same comment in the last two issues: "A short-term correction is overdue, but the intermediate trend remains positive."  Even though that is still an accurate and concise summary of this market, we changed the comment just so you wouldn't think we forgot to update it.

In general, there is a lot of complacency regarding the stock market. We see it in the low levels of $VIX, but mostly we see it in the media and analysts' comments -- no one is calling for a correction, and everyone is mentioning how positive the market is during the last two months of each year.  Something will have to give, eventually, but until there is some confirmed deterioration in the technical indicators, we would not consider taking a bearish position.  Rather, tighten trailing stops and enjoy the bullish ride.

$SPX continues to rise within a fairly steep uptrend channel (see Figure 1).  Moreover, there is now a support area at 1340, with the major support areas at 1325 and 1290 below that.  Thus the chart of $SPX is bullish from an intermediate term viewpoint.  We would not consider bearish positions as long as $SPX is above 1340.

The equity-only put-call ratios also remain on intermediate-term buy signals.  The standard ratio -- Figure 2 -- has fallen to new relative lows, and that's a confirmation of the bullish trend.  As long as these put-call ratio charts are declining, they're bullish.  The weighted ratio has been a bit more problematic: it has not fallen below September lows, but our computer analyses nevertheless continue to maintain that it is still on a buy signal.  Other put-call ratios, such as S&P 500 futures weighted, $OEX weighted, and QQQQ weighted all have bullish charts as they continue to decline.  These latter three are nearing the bottom of their charts, as opposed to the equity-only ratios which continue to remain at relatively high overall levels.

So, the intermediate term picture remains positive, according to the $SPX chart and the equity-only put-call ratios.  It is our other two indicators that raise the possibility of complacency and a short-term overbought condition.

Market breadth has generally been positive for weeks now.  An occasional two or three days of consecutive negative breadth is all that the bears have been able to manage since July.  As a result, breadth would generate sell signals the next time breadth is negative for two or three days in a row.

Finally, the volatility indices ($VIX and $VXO) remain at very low levels. $VXO has been below 11 for much of the past week.  It is certainly true that the broad market can continue to rally as long as $VIX remains low.  However, traders should be very aware of how $VIX is behaving.  If it begins to trend upward, a correction is at hand.  So far, $VIX has not been "fooled."  That is, it has refused to shoot upward when the market has its occasional down days.  In that regard, $VIX has been a very accurate assessor of market conditions.  So, watch $VIX especially on down days.  If it's not moving higher, then you can pretty much be assured that the downward market move is a short-lived one. However, if $VIX closes above 12.70, that would be our first alert to danger.  A close above 14 would be a more major sell signal for $VIX.

In summary, stay with your long positions, tightening trailing stops and taking partial profits in deference to the short-term overbought condition.  However, do not attempt to short this market or buy puts as long as $SPX is above 1340.

Lawrence G. McMillan is the author of two best selling books on options, including Options as a Strategic Investment, recognized as essential resources for any serious option trader's library.