Data Turns Slightly Cautionary
Opinion: The indexes put in a mixed performance Friday as half advanced while half declined. Internals were questionable as well as trading volumes, in our opinion. While some new highs were made, some other technical aspects suffered including the picture for the U.S. Dollar. As the data has turned slightly negative, our near term outlook is neutral in spite of the short term uptrends remaining intact. Valuation, sentiment and the dollar keep us cautious for the intermediate term.
- On the charts, the SPX (page 2) put in a fractionally new closing high while the COMPQX (page 3) put in a more notable new high. The DJT (page 3) close lower and back below its 50 DMA as the MID and RUT (page 4) closed lower as well. Breadth was slightly positive on the NYSE as volumes declined while the NASDAQ internals were negative as volumes increased, thus shedding some shadow on the COMPQX new high.
- What may have been the more significant technical event was the action in the U.S. Dollar as measured by the UUP ETF. The UUP closed below high volume support and near its lows of the day. As well, it closed below its 50 DMA for the first time since last July. As the dollar has seen such a significant rise over that time frame, it appears, in our opinion, to be quite extended and vulnerable. Friday’s action suggests we may be seeing the beginnings of a correction there. If so, as the dollar and commodities have had a historically strong inverse correlation, a lift in some commodity prices may be seen that could be an issue for the equity markets.
- The data has turned slightly negative as the NYSE 21 day McClellan OB/OS Oscillator is an overbought +57.78 as the balance remain neutral. The WST Ratio and its Composite are both bearish at 62.0 and 164.4 while the OEX Put/Call Ratio (smart money) has the pros long puts at 1.47. The ISEE Put/Call Ratio (contrary indicator) is now very bearish at 21.5 as foreign options traders are at their highest level of call exposure in several months.
- In conclusion, the charts and data suggest a near term neutral outlook by our work while the forward p/e for the SPX based on forward 12 month estimates is at a new decade high of 17.2X suggesting intermediate term caution.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.82% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.25 versus the 10 Year Treasury yield of 1.92%.
SPX: 2,081/???
DJI: 17,827/18,204
COMPQX: 4,994/???
DJT: 8,795/8,912
MID: 1,520/???
RUT: 1,249/1,266