Psychology Remains Cautionary
Opinion
The indexes closed mixed Friday with positive internals on the NYSE and mixed internals on the NASDAQ. All closed at varying points within their intraday ranges as volumes rose on both exchanges. There were positive and negative events on the charts while the data continues to send a somewhat cautionary message, particularly in psychology. Our net interpretation of the evidence leaves us staying with our near term “neutral/negative” view due to psychology, stochastic signals and valuation, all of which imply a poor risk/reward currently exists for the markets.
- On the charts, the indexes closed mixed with the DJI (page 2) and DJT (page 3) closing lower on the day. The rest closed higher with the MID (page 4) making a new closing all-time high and above resistance. A negative signal came from the broader, unweighted VALUA (page 5) that gave a “bearish stochastic crossover” signal. Beyond that, the bulk of the indexes remain within their tight sideways patterns that have been in place for the past 2 weeks. We would also note the VIX (page 9) back at a two year low suggests an increase in volatility in the near term, likely resulting in market weakness.
- The data, in our opinion, still carries several warning signals for the near term. While the 1 day McClellan OB/OS Oscillators remain neutral (All Exchange:+1.18 NYSE:-5.48 NASDAQ:+6.93), the 21 day levels remain overbought (All Exchange:+83.66 NYSE:+98.03 NASDAQ:+73.57). Insiders continue to shed stock as the Gambill Insider Buy/Sell Ratio has dropped to a bearish 6.5 while the crowd measured by the Rydex Ratio (contrary indicator) finds the leveraged ETF traders near its year high at 58.8 and very leveraged long. The pros as measured by the OEX Put/Call Ratio (smart money) have flipped back to being very long puts at 2.38 as they bet heavily on near term weakness occurring. As such, the psychology indicators are the exact opposite of what we would like to see in order to become active buyers.
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- In conclusion, while the charts remain broadly neutral in terms of recent action, the combination of poor psychology, low volatility and high valuation suggest near term risk/reward is too unappealing to warrant our enthusiasm. We remain near term “neutral/negative” in our outlook.
- Forward 12-month earnings estimates for the SPX from IBES of $126.32 leave a 5.81% forward earnings yield on a 17.2 forward multiple.
- SPX: 2,119/2,175
- DJI: 18,026/18,582
- NASDAQ: 4,971/5,175
- DJT: 7,696/8,017
- MID: 1,518/NA
- Russell: 1,177/1,219
- VALUA: 4,753/4,903