McClellan OB/OS Oscillators Oversold
Opinion
Our next report will be Monday, August 11. Yesterday’s break in the equity markets on strong volume did significant damage to the charts but pushed the McClellan OB/OS Oscillators into oversold territory. The net result of our interpretation of the current charts and data is that some potential for further market weakness remains over the near to intermediate term.
- On the charts, all of the indexes closed notably lower on heavy volume and broadly negative breadth and up/down volume. The SPX (page 2) closed below its 50 DMA and support while remaining below its prior uptrend line. The DJI (page 2) also broke below support and its 50 DMA and remains below its uptrend line as well. The COMPQX (page 3) closed below its uptrend line while also breaking near term support but remains above its 50 DMA. The DJT (page 3) closed below its 50 DMA for the first time since April while breaking support on volume. The RUT (page 4) broke support and remains below all of its DMAs.
- Finally, the MID (page4) appears to have broken below the neckline of what we have suspected to be a “head and shoulders” formation. If that is the case, the downside target for the MID would be in the 1,340 range. It did break below support and its uptrend line going back to early last February. All of the indexes closed at or near their lows of the day. All of these events are obviously negative from a technical perspective.
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- Looking at the data, yesterday’s plunge pushed all of the McClellan OB/OS Oscillators into oversold territory (NYSE:-131.07/-65.99 NASDAQ:-69.39/-83.43). The NYSE 1 day is very oversold. Yet we would note that during meaningful market corrections, it is not unusual to see the 21 day levels drop to -100 which has yet to be achieved. Meanwhile, there has not been a notable shift in sentiment at this point. The OEX Put/Call Ratio (smart money) shows the pros remain heavy in puts at 1.4 while the detrended Rydex Ratio (contrary indicator) still shows the leveraged ETF traders to be overly optimistic at 1.17. The Gambill Insider Buy/Sell ratio remains a neutral 15.6 as of 7/31.
- In conclusion, although the OB/OS are oversold, other data suggests some further downside risk remains for the near term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.55 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.39 versus the 10 Year Treasury yield of 2.56%.
- SPX: 1,925/1,963
- SPX: 16,406/16,870
- NASDAQ: 4,349/4,449
- DJT: 8,141/8309
- MID: 1,370/1,409
- RUT: 1,120/1,159