Stochastic Levels Remain Overbought
Opinion
While the indexes closed mixed yesterday with little change for the most part, the DJT continued to suffer, closing markedly lower on the day and below support. With the data turning slightly cautious and stochastic levels overbought, we are near term neutral/negative as we remain cautious for the intermediate term due to valuation and psychology.
- On the charts, the indexes closed mixed with fractional changes for all except the DJT (page 3). It closed sharply lower and at its lows of the day while closing below support and continuing its intermediate term downtrend. We remain of the opinion that the DJT, having been the leading index over the past several months, is sending a cautious message for the indexes as a whole. Of interest to us in that regard is the % of stocks in the SPX trading above their 50 DMAs remains weak at 61% implying a lack of healthy breadth.
- We would also note the U.S. Dollar as measured by the UUP ETF and 10 Year Treasury yield are at resistance. Should they manage to surpass said resistance on a closing basis, we believe it would send another cautionary technical tone. All of the stochastic readings, with the exception of the DJT, remain overbought.
- On the data, all of the McClellan OB/OS Oscillators remain neutral (NYSE:+4.44/+5.94 NASDAQ: +15.54/-7.24). Warning signals are coming from the OEX Put/Call Ratio (smart money) that still shows the pros weighted to puts at 1.53 and expecting weakness while the new Investors Intelligence Bear/Bull Ratio (contrary indicator) at 15.8/50.6 suggests broad complacency among investment advisors. The rest of the data remains primarily neutral.
- Valuation continues to be a concern for the intermediate term as the forward p/e for the SPX based on 12 month forward earnings estimates from IBES remains at a decade high of 17.1X and, in our opinion, vulnerable.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.85% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.33 versus the U.S. 10-Year yield of 2.25%.
- S&P 500: 2,115/?
- US 30: 18,041/?
- NASDAQ Composite; 5,015/?
- Dow Jones Transportation: 8,482/8,769
- S&P Midcap 400: 1,525/?
- Russell 2000: 1,239/1,263