Breadth Continues Negative Pattern
Opinion
The markets closed mostly lower Friday on very high volume likely due to options expiration. Early attempts at a rally failed as breadth and up/down volumes were broadly negative. Given the poor market breadth and current chart patterns, we continue to view the short term outlook for the major equity indexes as neutral/negative.
- On the charts, most of the indexes closed lower as volumes swelled. A/D was broadly negative along with up/down volume. Only the DJI (page 2) managed to close higher on the day making a new all-time high. However, it closed well off of the highs of the day forming a potentially bearish “shooting star” candlestick pattern should it gap down and close lower today. The rest of the indexes closed lower as the MID (Page 4) and RUT (page 4) suffered the worst as both failed to violate resistance and their short term downtrend lines. The RUT is once again below its 50 DMA. As such, the split performance of the indexes continues. The COMPQX (page 3) attempted to penetrate resistance intraday but failed by the close while the DJT (page 3) formed a “bearish engulfing pattern” sending a short term negative signal. Both the all-exchange and NASDAQ A/Ds remain in downtrends suggesting a continuing erosion of market breadth. As such, the charts a looking short term negative.
- The data remains primarily neutral including all of the McClellan OB/OS Oscillators (NYSE:-42.59/-13.16 NASDAQ:-28.30/-11.7). The WST Ratio and its Composite are also neutral at 61.3 and 148.5. The one day Put/Call Ratios are at odds as the Equity Put/Call Ratio (contrary indicator) shows the crowd heavy in calls and too optimistic at a 0.55 bearish signal but the OEX Put/Call Ratio (smart money) shows the pros long calls as well at 0.67 sending a bullish signal. Thus there is little directional implication coming from the data at this point.
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- In conclusion, Friday’s action was a repeat of the split performance of the indexes while breadth and volume characteristics continue to have a negative tone. So, we remain of the opinion that the short term outlook for the major indexes is neutral/negative.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.39% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.46 versus the 10 Year Treasury yield of 2.59%.
- SPX: 1,979/?
- DJI: 16,980/?
- NASDAQ: 4,453/4,594
- DJT: 8,465/?
- MID: 1,410/1,427
- Russell: 1,137/1,159