Data Suggests Short-Term Bounce
Opinion
All of the indexes closed lower yesterday with negative internals as volumes increased on the NYSE but declined slightly on the NASDAQ. All of them closed at or near their lows of the day. Some further negative chart signals were generated that increase our concerns for the intermediate term while the data suggests the possibility of a short term bounce may be at hand. We are now of the opinion that market rallies may be best viewed as selling opportunities.
- On the charts, all of the indexes closed notably lower with very poor internals that resulted in a few more negative technical signals that we view as more problematic for the intermediate term. The SPX (page 2) closed fractionally below its 50 DMA and flashed a bearish stochastic crossover signal. It did manage to hold support but only 44.6% of its components are above their 50 DMAs. The DJI (page 2) closed below support and is back below its long term uptrend line. The DJT (page 3) also closed below support and generated a bearish stochastic crossover signal.
- The COMPQX (page 3), MID (page 4) and RUT (page 4) did not generate any events but all closed near their intraday lows with the RUT managing to barely hold on to support. Our take away from the charts is one of continuing distribution and internal weakness that poses issues for the more intermediate term view.
- The data is suggesting some possible near term relief from the options levels. The Total and Equity Put/Call Ratios (contrary indicators) show the crowd very long puts at 1.03 and .78 while the OEX Put/Call Ratio is a neutral 1.38 suggesting the pros are not expecting much in either direction. The WST Ratio and its Composite are oversold at 18.3 and 86.3 suggesting a bounce while the 21 day NASDAQ McClellan OB/OS Oscillator is oversold at -58.57. The rest of the OB/OS levels are neutral. As such, the data, in our view, implies some possible near term lift.
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- In conclusion, although the indexes may see a bounce near term, we believe evidence is continuing to mount suggesting the intermediate term to be a difficult environment. Poor breath, valuation and high levels of leverage, when added to the chart signals, suggest rallies may be best used as selling opportunities.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.92% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.5 versus the 10-Year Treasury yield of 2.28%.
- S&P 500: 2,100/2,130
- DJI: 17,683/18,120
- NASDAQ Composite: 5,103/?
- Dow Jones Transportation: 8,127/8,310
- S&P Midcap 400: 1,482/1,510
- Russell 2000: 1,244/1,274