Data Turns More Cautionary
Opinion
All of the indexes closed higher Friday and above resistance levels we thought would be near term barrier levels. There were other technical improvements in the charts as well. However, volumes dropped notably on the advance while some of the data has turned more cautionary suggesting the recent rally may be stretched.
- As stated above, all of the indexes closed higher on Friday and at or near their highs of the day. Breadth was positive but volumes declined on the advance. All of the resistance levels were surpassed and are adjusted below while the COMPQX (page 3) closed above its 50 DMA, The DJI (page 2) closed above its short term downtrend line and the MID (page 4) closed above its 200 DMA. All of these events are positive.
- However, although not a critical event, all of the stochastic levels for the indexes are now overbought. They have yet to give bearish reversal signals and can stay overbought for extended periods. Yet, there current condition is worthy of note, in our opinion. As well, the decline in volumes might be interpreted as a weakening signal. Given the almost vertical nature of the rally, we suspect some neutral to negative action is inevitable at some point, possibly sooner than later as suggested by the following data points.
- On the data, the NYSE 1 day McClellan OB/OS Oscillator is now extremely overbought at +101.98 while the NASDAQ 1 day is an overbought +76.14. They both imply the rally is due for some adjustment. Both of their 21 day levels are neutral at +20.74 and -8.42 respectively. The OEX Put/Call Ratio (smart money) has the pros long puts again and looking for weakness at 1.59 while insiders have viewed the rally as a selling opportunity with the Gambill Insider Buy/Sell Ratio dropping to 9.1. that is still above the 8 bearish level but is close enough to be of some concern. In contrast, the leveraged ETF traders measured by the Rydex Ratio (contrary indicator) have their bull caps firmly on their heads at 46.2 implying overconfidence on their part.
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- In conclusion, although the charts saw some bullish action on Friday, we are of the opinion, based on their vertical advance and the data, that some pause/correction may be expected over the near term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.54% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.41 versus the 10-Year Treasury yield of 2.27%.
- S&P 500: 1,926//1,969
- Dow 30: 16,465/16,909
- NASDAQ Composite: 4,355/4,510
- Dow Jones Transportation: 8,315//8,581
- S&P Midcap 400: 1,338/1,388
- Russell 2000: 1,095/1,130