Internals Remain Questionable
Opinion
Two of the major equity indexes closed at new all-time highs yesterday while other indexes remain in short term downtrends. The result is what we believe to be a continuation of bifurcated markets with questionable internals. So while some broadly followed indexes are making headlines, we remain of the opinion that advances are becoming increasingly selective drawing the general health of the equity markets into question for the near term.
- On the charts, both the DJI (Page 2) and DJT (page 3) made new closing highs yesterday while the rest of the indexes advanced with the exception of the MID (page 4) closing lower. Yet we find a few bones to pick regarding the gains. First, the NYSE breadth was almost dead even with advancers barely beating decliners while volumes on the NASDAQ advance declined again. The COMPQX (page 3) remains in a short term downtrend.
- We also find it disturbing that with the SPX (Page 2) pressing for new highs, 40% of the stocks in the index are trading BELOW their 50 DMAs. This cannot be described as a broad based advance. Meanwhile the All-Exchange and NASDAQ A/Ds are below their 50 DMAs as well with the NASDAQ A/D in a notable series of lower highs and lower lows showing very poor breadth. Increasingly narrow breadth during market advances is usually seen as signs of a market ready for correction.
- The data remains mostly neural including 3 of the 4 McClellan OB/OS Oscillators. Only the NYSE 1 day OB/OS is oversold at -51.75. The pros are once again loading up on puts as noted by the OEX Put/Call Ratio (smart money) at 1.55 while the Rydex Ratio (contrary indicator) still shows the leveraged ETF traders as overly optimistic at 56.8. So sentiment remains cautionary.
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- In conclusion, while the large cap indexes may continue their northward trek, market internals suggest the air is quite rarified and could result in the markets needing to “catch their breath” at a lower altitude.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.42% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.46 versus the 10 Year Treasury yield of 2.60%.
- SPX: 1,979/?
- DJI: 16,980/17,140
- NASDAQ: 4,453/4,594
- DJT: 8,465/?
- MID: 1,410/1,427
- RUT: 1,137/1,158