McClellan 1-Day OB/OS Oscillators Oversold
Opinion
All of the indexes closed lower yesterday on heavy volume and broadly negative internals. The charts suffered technical damage across the board. However, the magnitude of the declines has shifted the data to a slightly positive short term outlook suggestive of some sideways movement or possible bounce. We remain concern for the more intermediate term as valuations continue to be historically stretched as well as the recent action in the U.S. Dollar suggesting some possible lift in commodity prices that could influence Fed policy.
- On the charts, all of the indexes suffered. All of the indexes followed the DJT (page 3) by closing below their 50 DMAs. As well, the SPX (page 2) closed below support and its intermediate term uptrend line. The COMPQX (page 3) suffered the same technical damage as the SPX. While the DJI (page 2) held support, its 50 DMA and intermediate term uptrend line were also violated. The MID and RUT (page 4) suffered the worst % declines and closed below their 50 DMAs and support while the DJT closed below another support level. The significant increase in trading volume again suggested institutional distribution. All in all, it was a dark day for the charts.
- Looking at the data, there is some reason to expect a pause or possible short term bounce in the declines as the 1 day McClellan OB/OS Oscillators are now oversold at -61.31 and -68.86 respectively. Their 21 day levels remain neutral at +23.63 and -7.86. The Total and Equity Put/Call Ratios (contrary indicators) now show the crowd going long puts at 1.05 and .72 sending a bullish contrarian signal.
- On the negative side, the OEX Put/Call Ratio (smart money) still shows the pros long puts, but less so, at 1.44 while the Rydex Ratio (contrary indicator) shows the leveraged ETF traders unmoved from their highly leveraged long positions at 70.6. So, on balance, we believe the data has taken on a slightly positive tone.
- We remain concerned for the intermediate term as the forward p/e for the SPX based on 12 month forward estimates from IBES remains near a decade high at 17.0X. As well, we believe we are seeing some upward pressure in commodity prices in response to the dollar’s recent decline that could enter into the Fed’s policy considerations.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.89% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $122.74 versus the U.S. 10-year yield of 2.05%.
- S&P 500: 2,091/?
- US 30: 17,827/18,204
- NASDAQ: 5,020/?
- Dow Jones Transportation: 8,660/8,912
- S&P Midcap 400: 1,512/1,534
- Russell 2000: 1,240/1,267