Sentiment Remains A Problem
Opinion
We continue to be of the opinion that the near term outlook for the major equity indexes is neutral to negative. Characteristics of institutional distribution are still being expressed while market internals are rather weak. As well, current sentiment data suggests complacency on the part of the crowd as professional traders are becoming increasingly cautious.
- On the charts, yesterday’s rally had relatively little impact. No resistance levels were broken. Market stats were positive for the most part but, once again, we see the NASDAQ volume declining on the bounce versus the heavier volume from Tuesday’s decline. With the NASDAQ A/D below its 50 DMA, internal breadth remains a concern. The DJI (page 2) tested support along with the MID (page 4). The DJT (page 3) closed at its highs for the day but remains below its short term uptrend line and has now joined the rest of the indexes in flashing a bearish stochastic crossover signal.
- Looking at the data, all of the McClellan OB/OS Oscillators are neutral (NYSE:-47.19/+45.24 NASDAQ:-4.4/+15.15) as well as the WST Ratio and its Composite (46.1/126.2). It is the current sentiment readings that are tilting the scales to the negative side, in our opinion. The new Investors Intelligence Bear/Bull Ratio (contrary indicator) shows advisors to be overly confident at 14.1/57.6 along with the Rydex Ratio (contrary indicator) showing the leveraged ETF traders equally extreme at 59.2. In contrast, the OEX Put/Call Ratio (smart money) once again shows the pros gearing up for weakness as they are heavy in puts at 2.71.
- Finally, we have observed over the past several sessions that stocks declining on heavy percentage changes in trading volume are well outpacing those stocks gaining on strong increases in volume as reported in IBD. It is yet another element implying weakening internals and distribution, in our view.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.44% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.46 versus the 10 Year Treasury yield of 2.53%.
- SPX: 1,979/?
- DJI: 16,980/17,140
- NASDAQ: 4,450/?
- DJT: 8,294/???
- MID: 1,420/1,444
- RUT: 1,150/1,166
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