Charts Suffer Some Damage

NYSE 1-Day McClellan OB/OS Oversold

Opinion

All of the indexes closed lower yesterday with broadly negative internals as volumes rose on the NYSE but declined slightly on the NASADQ. The charts suffered some technical damage. SPX breadth continued to slide while the data is now mixed with the NYSE 1-day OB/OS oversold. As such, we now suspect we may see a short term pause in the markets from the data while the more intermediate term picture has darkened a bit further given the chart action.

• On the charts, all of the indexes closed lower on the day and at or near their respective lows. Some of the charts suffered damage in the following fashion. The SPX (page 2) closed below its 50 DMA and decisively below its prior triangle formation implying a negative resolution as the index closed at support and on its long term uptrend line. Should support and the uptrend be violated on the SPX, the picture would darken further. As yet, it is not the case.

• The DJI (page 2) closed below its 50 DMA and its near term support with the COMPQX (page 3) closing below its short term uptrend line suggesting a possible change in trend. While the DJT (page 3) and RUT (page 4) had no technical events, the MID (page 4) closed its 50 DMA, below support and directly on its intermediate term uptrend line. Again, should the uptrend line be violated, it would be another negative.

• So, as a whole, the charts soured a bit. However, the % of SPX components trading above their 50 DMAs has shrunk to 39.4% which is a level that, in the past, has been followed by some degree of market stabilization. As such we remain near term neutral/negative in our outlook.

• The data is largely neutral including the Equity and OEX Put/Call Ratios at .61 and 1.32 respectively. On the positive side, the NYSE 1-day McClellan OB/OS Oscillator is now oversold at -62.81 implying a possible pause. However, sentiment remains an issue with the Investors Intelligence Bear/Bull Ratio (contrary indicator) showing advisors overly optimistic at 15.8/51.5 along with the leveraged ETF Traders as measured by the Rydex Ratio (contrary indicator) at peak levels of bullishness of 71.5. As such, the data is somewhat non-directional at this point.

• At 16.9X forward 12 month IBES earnings estimates for the SPX, we continue to see the markets vulnerable to adjustment over the intermediate term.

• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.93% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.23 versus the 10-year Treasury yield of 2.31%.
• S&P 500: 2,096/2,132
• US 30: 17,835/18,178
• NASDAQ; 5,015/5,100
• Dow Jones Transportation: 8,242/8,607
• S&P Midcap 400: 1,515/1,544
• Russell 2000: 1,239/1,263