We continue to be of the opinion that a somewhat defensive tone should be taken regarding the major equity indexes over the near term based on the data and charts.
- Although yesterday’s weakness did bring some of the one-day data points down into neutral territory, the slightly longer-term data continues to suggests caution for the short term. The NYSE and OTC 21 day McClellan OB/OS Oscillators remain overbought (the NYSE notably so) at +123.2 and +68.08 respectively.
- The percent of SPX stocks above their 50-DMAs remains extended at 88.2 as the NYSE Net New Highs has made a lower low with the OTC Net New Highs now having made a lower high and a lower low. The Net New High data suggests internal deterioration.
- Meanwhile, sentiment that has the greater short term influence remains at opposite extremes with a Rydex Ratio (contrary indicator) of 40.7 showing the leveraged ETF traders still heavily long while the Gambill Insider Buy/Sell Ratio remains at a very low and cautionary 5% as of 1/29. Insiders are almost totally absent from the buying roster. As such, the data, in our opinion, suggests short term caution should continue to be exercised.
- On the charts, there are only two points worthy of comment. First, and possibly most important, is the DJT (page 3) being the worst performer of the day yesterday by a sizable margin. As stated over the past several weeks, it has been our opinion that the DJT has been the “leading index” for the overall markets. If that continues to be the case, yesterday’s action sets a darker short term tone.
- We would also note the OTC (page 3) formed a “bearish engulfing pattern” yesterday. The pattern happens when a stock or index opens and closes down at levels that completely engulf the prior day’s “real body”. It is considered a short term bearish signal. As a number of the candlestick patterns have not played out lately, we would not over emphasize this event. Yet given the state of current evidence, it adds to our short term concern.
- For the longer term, the outlook remains bullish for equities as the IBES Valuation Model suggests equities are quite undervalued with the forward 12-month earnings yield for the SPX versus the 10-year Treasury yield standing at 7.5% versus 1.97%.