Small & Mid-Caps Continue To Lag
Opinion
All of the indexes closed higher yesterday with positive internals as volumes declined on the NYSE and rose on the NASDAQ. All closed at or near their intraday highs. The charts saw some improvement as the large cap indexes closed above resistance levels that we thought would not be violated. Yet the small and mid-cap indexes continue to lag. The data remains a mixed bag of positive, negative and neutral signals but the OB/OS remain neutral and imply the indexes may see more near term lift. Yet internals remain quite poor, in our view, suggesting a more cautious intermediate term outlook.
- On the charts, all of the indexes closed higher yesterday with positive internals. Our assumption that resistance levels would not be violated proved to be incorrect for the large caps as the SPX (page 2), DJI (page 2) and COMPQX (page 3) all closed above resistance whose levels are adjusted below. As well, the SPX and DJI both closed above their short term downtrend lines.
- The DJT (page 3), MID (page 4) and RUT (page 4) all closed above their 50 DMAs. Yet they remain below their respective resistance levels as the split between the large cap/small& midcap performance continues. Said split remain a real concern for us as such a dynamic is typically seen near the end of a bull market as money chases fewer and more liquid stocks in an attempt to outperform their benchmark. This is also displayed by the NYSE A/D making a lower high while the NASDAQ A/D remains below its 50 DMA as well as making a lower high within its current downtrend. There simply is not enough breadth to imply the market internals are in healthy shape, in our opinion.
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- The data is all over the map but the McClellan OB/OS Oscillators may be the more influential over the near term as they remain in neutral territory (NYSE:-16.84/-12.31 NASDAQ:-6.52/-16.52) with no overbought conditions present that are frequently found near rally tops. As well, the Gambill Insider Buy/Sell Ratio has turned a bullish 31.9 as insiders have been back at the buying table. We do not know what sectors may be seeing the buying but their return is a positive event.
- In conclusion, while the large cap indexes may continue to see some near term strength, internal structure remains weak and suggestive of a topping process while the 16.6X forward p/e for the SPX suggests valuation is elevated.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.04% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.74 versus the 10-year Treasury yield of 2.27%.
- SPX: 2,020/2,102
- DJI: 17,150/17,903
- NASDAQ; 4,923/5,123
- DJT: 7,895/8,330
- MID: 1,394/1,480
- Russell: 1,145/1,180