Opinion: All of the indexes advanced yesterday with some recouping most of Tuesday’s losses. Internals were positive but volumes declined notably on the NYSE while NASDAQ volumes increase. In spite of the rally and the COMPQX making a new closing high, we find several issues that continue to pester us regarding the near term market prospects including narrowing breadth. Thus, at this point, we do not see enough of a shift in the technical and data evidence to alter our near term neutral/negative and intermediate term cautious outlooks for the indexes.
- On the charts, all of the indexes advanced and closed at or near their highs of the day with the COMPQX (page 3) making a new closing high. However, the COMPQX new high is something we find difficult to embrace with any real enthusiasm as its breadth continues to deteriorate. Yesterday’s NASDAQ A/D was positive. However, its longer term A/D made yet another lower low and remains below its 50 DMA suggesting the index is advancing with fewer and fewer participants. This erosion of the foundation suggests elevated risk, in our opinion, that frequently results in sudden and dramatic breaks. With only 54.6% of the SPX components trading above their 50 DMAs, much the same can be said for the NYSE.
- While the RUT (page 4) closed back above its 50 DMA and the both the SPX (page 2) and DJI (page 2) closing back above their intermediate term uptrend lines, they, along with the MID (page 4), remain on bearish stochastic crossover signals. So although the indexes advanced, plenty of issues remain, in our view.
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- On the data, all of the McClellan OB/OS Oscillators are neutral (NYSE:-15.06/-9.68 NASDAQ:-2.3/-9.31). The Total Put/Call Ratio (contrary indicator) is bullish at 1.07 as the crowd is buying puts but is countered by a bearish OEX Put/Call Ratio (smart money) at 1.76 as the pros are very long puts expecting weakness. The new Investors Intelligence Bear/Bull Ratio (contrary indicator) continues to show advisors almost entirely on one side of the boat at 14.9/48.5 that remains of intermediate term concern. The forward 12 month p/e for the SPX based on IBES estimates also remain troublesome for us at a decade high of 17.1X.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.85% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.25 versus the U.S. 10-Year Treasury yield of 2.13%.
SPX: 2,096/2,132
DJI: 18,041/18,319
COMPQX; 5,015/???
DJT: 8,308/8,607
MID: 1,525/1,544
RUT: 1,239/1,263