Here's Why I Can't Be Bearish ... Yet

Monday felt like a digestion day in the market.

The S&P 500 churned around the 4700 area, the same place it has been for a few days now. Nasdaq did the same at the 16000 zone as well. In fact this may be the time to check in on the lines we have been looking at all year.

You might recall this line on the chart of the S&P that we started watching in the spring. It has kept the rally in check for most of the year. Because breadth remains strong, I can't be bearish, but I do think we could see a pullback like we saw in April or even last summer. At this point, I don't think we're due for a move like we saw in May or September. I would look for a move like that if breadth turned weak on a persistent basis.

Nasdaq has a similar line. The main difference is that with the exception of July and August the corrections off this line were quite severe. For now I still think as long as breadth is good, a pullback from the line is more apt to look like the summer, rather than the spring or fall.

Finally the big-cap Dow Jones industrial average has a line that looks the same. These lines are simply showing some resistance and after the S&P has been green for eight straight days and Nasdaq for 11, would anyone be surprised if we pulled back? Surely, no one would.

So, what would surprise folks?

I am not really certain if a few down days would do it or one seriously harsh day. But we know complacency is high.

On Monday, the International Securities Exchange Call/Put Ratio chimed in at 1.57, which is the highest reading since early June. If we take a look at early June we can see how strong breadth was coming into the early month peak. We backed off and the Russell (IWM) rallied again into the end of the month. But look at breadth, which is the top chart: it was already making lower highs by the end of the month.

Should that happen now (breadth starts making lower highs and faltering) then it will be time to turn cautious. But for now breadth is at a new high, not a lower high.

Finally I would point out that ever since the Daily Sentiment Index (DSI) for the Volatility Index reached single digits last Wednesday after the close the VIX has been up.

I have said I would expect a bout of volatility and thus far we haven't seen one. But is the VIX itself telling us there will be one? I believe it might be.

At this point I still think we're just looking for a pullback and another rally.