Some cynics say that it's the market's "job" to behave in a manner so that it maximizes the number of losing traders at any one point in time. The recent market movements certainly seem to fit in that view, at least for the short-term. The last two advances to new 6+-year highs by $SPX have been met, not with bullish follow-through, but a sharp correction instead. But, as soon as the correction seems to gain momentum, the market bolts to higher highs once again. On one hand, option traders should welcome this sort of action, for it raises actual volatility. On the other hand, it can be frustrating -- especially if one is attempting to trade short-term market movements.

The latest move to new highs (yesterday) seems to fit in this pattern. The technical indicators are not enthusiastic about the move, and in fact some sell signals have set up.



But let's begin at the beginning -- and that's with the chart of $SPX. It's still in a bullish uptrend, even though the steepest uptrend line has been slightly violated. This market is still very reminiscent of the 1995 bull market, which continued higher in a more volatile manner after its tight uptrend was broken. From a longer-term perspective, then, we would expect this market to do the same -- perhaps continuing higher until late this year.



In the meantime, though, some negative signs have arisen. Perhaps the most surprising of which is that the equity-only put-call ratios have rolled over to sell signals rather abruptly. The charts are shown in Figures 2 & 3 (note: the standard chart now shows the "dividend-adjusted" data, having thrown out the irrelevant dividend arbitrage volume).



Market breadth has been very positive this year. The market can certainly continue to rise while breadth is in overbought status, of course, but it does mean that a day or two of declines would throw breadth into a sell signal.

Finally, the volatility indices have plunged to near all-time lows again. While the market can theoretically continue to rise even while these indices are so low, it usually takes a breather when $VIX and/or $VXO dips below 10, as they did again yesterday.



In summary, the market is stair-stepping its way to the stars. The good news is that this sort of environment can produce increased volatility, which should improve one's ability to trade these broad market movements.

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.