1-Day McClellan OB/OS Oversold
Opinion
While the larger cap indexes remain in their uptrends, the overall market internals continue to erode suggesting the foundation of the more popular indexes is being compromised. As such, given that the McClellan 1 day OB/OS are oversold, we would still view the potential bounce with some skepticism. In short, we are of the opinion that the internal correction the markets have been experiencing has a probability of spreading to the more widely followed indexes.
- On the charts, all of the indexes closed lower yesterday as volumes shrank. Internals were mostly negative. Both the DJI (page 2) and COMPQX (page 3) bounced off of their trend lines. However, the RUT (page 4) remains below its current downtrend along with the MID (page 4). No support/resistance levels were violated. What continues to concern us is the following. The All –Exchange, NYSE and NASDAQ Net New Highs and Advance/Decline charts still show a series of lower highs and lower lows. We believe this is evidence of an internal correction that has yet to be expressed by the large cap indexes. In our experience, it is very unusual for such internal erosion not to ultimately find its way into the larger cap indexes.
- On the data, the 1 day McClellan OB/OS Oscillators are oversold (NYSE:-57.47 NASDAQ:-55.16) suggesting some bounce potential. However, while the Equity Put/Call Ratio (contrary indicator) is a neutral .62 and the detrended Rydex Ratio (contrary indicator) shows the leveraged ETF traders moderating down to 1.11 but remaining on a bearish signal, the pros and insiders want nothing to do with the buy side. The OEX Put/Call Ratio (smart money) is a very bearish 1.8 while insiders are still sellers with a 6.5 Gambill Insider Buy/Sell Ratio.
- In conclusion, we believe the higher probability is that of the internal correction spreading to the larger caps before the “crowd” becomes sufficiently rattled to create a correction low.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.37 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.14 versus the 10 Year Treasury yield of 2.47%.
- SPX: 1,950/?
- DJI: 16,804/?
- NASDAQ Composite: 4,342/4,447
- DJT: 8,149/?
- MID: 1,391/1420
- RUT: 1,132/1,169
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