Internals Remain An Issue
Opinion
Yesterday’s modest action in the equity markets left most of the indexes fractionally lower on the day with the exception of the SPX. However, on closer inspection, we find the market internals continuing to display action suggestive of weakening internals. And while a good portion of the data is neutral, there are still some signs of caution suggesting some prudence regarding the near to intermediate term prospects for the major equity indexes, in our opinion.
- On the charts, yesterday’s declines were quite modest with the SPX closing fractionally higher. And although no support levels or trends were violated, internals were once again of some concern. Overall trading volume increased with declining stocks outnumbering the advancers yet up volume exceeded down volume suggesting, once again, that more money is chasing fewer and fewer stocks. This continuation of deteriorating breadth is of concern as, in past market corrections, we have usually seen the small to mid-caps decline as breadth deteriorates while the large caps mask said deterioration until they have finally been the last to leave the field. Although not of high significance, the SPX chart (page 2) shows a “doji” formation yesterday that we have seen prior to other market dips over the past 6 months suggesting some near term weakness. The MID (page 4) tested resistance but failed to violate while the RUT (page 4) managed to hold its 50 DMA. Of possible greater import is the NASDAQ A/D remains in a downtrend and below its 50 and 200 DMAs.
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- The data is mostly neutral including the McClellan OB/OS Oscillators (NYSE:-22.36/+24.14 NASDAQ:-21.73/-18.77). The OEX Put/Call Ratio (smart money) is still bearish as the pros stay long puts at 1.49 and 1.87 on its 1 and 15 DMAs while the detrended Rydex Ratio (contrary indicator) shows the leveraged ETF traders moderating their enthusiasm but still on a bearish signal at 1.06.
- In short, the weight of the evidence continues to lead us to a cautious outlook for the near to intermediate term for the indexes.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.35 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.21 versus the 10 Year Treasury yield of 2.51%.