Opinion: All of the indexes closed lower yesterday with broadly negative internals as volumes accelerated. The net result was a day of institutional distribution leaving the charts with some technical bruises that raise more yellow flags. The data is a mixed bag leaning slightly positive suggesting a possible pause in the slide. However, the chart signals may be of greater significance. As such, we remain neutral/negative for the short term and cautious for the more intermediate term outlook.
- On the charts, all of the indexes closed lower and at or near their lows of the day as volumes increased and internals were broadly negative. That structure suggests institutional distribution while a number of the charts saw some technical breaks. The SPX (page 2) closed below support while the DJI (page 2) managed to hold support but closed below its intermediate term uptrend line implying a possible change of trend. Both indexes are now on bearish stochastic crossover signals.
- The COMPX tested support but is also on a bearish stochastic crossover as it closed below its 9 month uptrend line, an event worthy of note, in our view. The DJT (page 3) continues to look terrible as it closed below support once again. We believe it is still sending a cautionary message for the rest of the indexes. The RUT (page 4) closed below its 50 DMA with a bearish stochastic signal. Finally, the MID closed at support but is also on a bearish stochastic crossover. We now find more than half of the SPX components trading below their 50 DMAs at 53.6%.
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- On the data, only the NYSE 1 day McClellan OB/OS Oscillator is oversold with the balance at neutral (NYSE:-56.54/-31.5 NASDAQ:-36.34/-32.99). The Total and Equity Put/Call Ratios (contrary indicators) show some crowd fear at 1.14 and .74 that may suggest a pause along with a bullish WST Ratio and its Composite at 23.9 and 97.8. The outlier is the OPEX Put/Call Ratio (smart money) at 1.46 suggesting the pros continue to expect further weakness.
- In conclusion, while the data suggests a possible pause, the charts are sending warning signals that may be of greater import. We remain neutral/negative for the short term and cautious for the intermediate term outlook.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.9% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.25 versus the 10-Year Treasury yield of 2.14%.
SPX: 2,096/2,132
DJI: 18,041/18,319
COMPQX; 5,015/5,101
DJT: 8,308/8,607
MID: 1,525/1,544
RUT: 1,239/1,263