Volume & Breadth ImproveOpinion
We were wrong in our expectations of some further short term market weakness as all of the indexes closed higher yesterday with improved breadth and volume. Multiple new closing highs were made on the indexes with some resistance levels being violated. Thus, some of the charts have resolved their sideways patterns to the upside. We are now forced to alter our outlook to neutral positive for the near term. The data is largely neutral with a few cautionary signals. However, said signals may not be enough to keep the indexes in check.
- On the charts, the recent sideways patters for several of the indexes resolved higher yesterday turning the charts positive in those cases. The SPX (page 2) closed above its 50 DMA but was, at this point, unable to surpass resistance. (We still find it troubling that only 53.6% of its components are above their 50 DMAs.) The COMPQX (page 3) made a new closing high along with the MID (page 4) and RUT (page 4). In their cases, there is now no overhead resistance to hamper progress at this point. The DJI (page 2) closed above its 50 DMA and resistance but did not make a new high. So, as we are unwilling to be inflexible when the market message appears to be changing, the charts now suggest higher levels are the greater probability over the near term.
- The data is still largely neutral, including the McClellan OB/OS Oscillators (NYSE:+14.56/-33.55 NASDAQ:+28.6/+0.08). There are 2 cautionary signals, one coming form the OEX Put/Call Ratio (smart money) at 1.56 as the pros remain weighted in puts. The second is the WST Ratio and its Composite at 74.9 and 178.0 creating a “bear alert” signal. However, such signals, depending on their timing, can actually be seen at the initiation phase of an uptrend. Later such signals have greater validity. So although the data has a slightly negative tone, it may prove to be insufficient to contain further near term progress.
- We remain concerned for the intermediate term as valuations remain extended in our view (SPX forward 12 month p/e 16.9X). As well, in spite of yesterday’s achievements, the A/D lines for the NYSE and NASDAQ remain in a series of lower highs and lower lows that continue to keep breath in question. Yet, as long as the Fed keeps the spigot open, the markets may continue to ignore these issues.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.91% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.40 versus the 10-year Treasury yield of 2.35%.
- S&P 500: 2,073/2,121
- iShares Dow Jones Industrial Average UCITS (XETRA:DJIEX): 17,698/18,165
- NASDAQ: 5,015/?
- Dow Jones Transportation: 8,242/8,566
- S&P Midcap 400: 1,511/?
- Russell 2000: 1,247/?