Breadth Improves
Opinion
As access to our data is unavailable this morning, the focus will be primarily on the charts for this commentary. In short, in spite of our prior concerns, the trends of all of the equity indexes remain intact whether they are up or sideways while the futures this morning are suggesting more of the same. No sell signals exist within what we believe to be extended patterns for some. As such, in spite of crowd sentiment being overly bullish, until there is a shift in the chart patterns, the current trends remain in force. Thus far, our concerns have been ignored which may continue to be the case until the charts say otherwise.
- Yesterday’s chart action left the SPX (page 2) and DJI (page 2) at new all-time closing highs yet again. Breadth did improve from the prior session discussed yesterday as advancers beat decliners by 2:1. Volumes were positive as well although declining somewhat on the NYSE. The weak opening proved to be the low of the day as it was instantly met with buying interest. Both the MID (page 4) and RUT (Page 4) remain in their sideways trading patterns but formed “bullish engulfing patterns” on the daily charts suggesting further near term strength. As such, we have yet to see any formal technical sell signals form the price charts. Until such signals occur, the current trends should be respected.
- While we have been concerned regarding data suggestive of risk, the markets have continued to advance. A recent example is the level of assets inside the group of inverse equity ETFs being at its lowest level since 2007. (Source: Hays Advisory) The “crowd” is at peak levels of bullish sentiment. As they are a contrary indicator, it would and does suggest caution. However, until the charts actually flash sell signals, the possibility of further advances for the markets remains.
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- In conclusion, while we continue to believe the current rally is extended and sentiment is very cautionary, until the charts actually start to yield some sell signals, said trends remain intact.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.24% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.82 versus the U.S. 10-Year yield of 2.34%.
- S&P 500: 2,015/?
- Dow 30: 17,283/?
- NASDAQ Composite: 4,593/?
- Dow Jones Transportation: 8,772/?
- S&P Midcap 400: 1,420/1,439
- Russell 2000: 1,155/1,186