NYSE 1-day & NASDAQ 21-Day OB/OS Oversold
Opinion
We continue to be of the opinion that the deterioration of internal breadth within the equity markets warrants some caution over the near to intermediate term. Yesterday’s action put a few more dents in the charts while breadth on the NYSE continued to erode. Some data suggests a possible pause in the weakness balanced against other data suggesting continuation. Yet, in our opinion, there is enough weight of the evidence suggesting prudence.
- On the charts, all of the indexes, with the exception of the RUT, closed lower yesterday at or near their day’s lows. Volumes increased with negative internals for the NYSE and slightly positive internals for the NASDAQ. The SPX (page 2) closed marginally below its uptrend line from mid-April but held support. The DJI (page 2) closed below its uptrend line that had functioned as support since early last February. This break of a six month trend may have greater significance. However, support for the DJI held. So until a lower low and lower high are experienced, the trend break could result in sideways action as opposed to a new downtrend.
- The DJT (page 3) saw the most damage but closed just above support that looks tenuous. A break of the DJT support would be another important negative sign, in our opinion, should it occur. The MID closed just above important support as well. However, if our suspicion that a “head and shoulders” pattern may have formed here, a break of support would imply more significant downside risk. In short, the charts weakened.
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- We would also note the All-Exchange A/D has closed below its 50 DMA, the % of SPX stocks above their 50 DMAs has dropped to 54.3%, the NASDAQ A/D has made a lower low and the Valueline Arithmetic is now below its 50 DMA.
- On the data, the 1 day NYSE McClellan OB/OS Oscillator is oversold at -67.62 with the 21 day NASDAQ a mildly oversold -51.28 suggesting a possible pause in the weak action. Yet the pros are still betting on more weakness with a very bearish 1.97 OEX Put/Call Ratio (smart money) while the detrended Rydex Ratio (contrary indicator) shows the leveraged ETF Traders remain too optimistic at 1.24.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.42 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.39 versus the 10 Year Treasury yield of 2.46%.