Data Remains Largely Neutral
Opinion: The indexes suffered notable losses on Friday with very negative breadth and higher trading volumes suggesting institutional distribution. The charts weakened on several levels while the data remains essentially neutral with a couple of mildly positive signals. So, while the short term may see some bounce or sideways movement for the indexes, we remain concerned for the more intermediate term outlook.
- On the charts, several cracks appeared in the following fashion. The SPX (page 2) closed below its intermediate term uptrend line from last October as well as its 50 DMA. The same can be said for the DJI (page 2). The DJT (page 3) closed below its 200 DMA and directly on support as it continues to show weak relative performance. All of the indexes closed near their lows of the day on heavier volume as all of the indexes followed the prior DJT signal by forming bearish stochastic crossovers. We would note, however, none of the respective support levels were violated on a closing basis. As such, we suspect there may be some very short term bounce or sideways action given that supports held on a difficult day.
- The data remains largely neutral including all of the McClellan OB/OS Oscillators (NYSE:-30.79/+25.91 NASDAQ:-24.33/+2.82). No oversold signals were generated from this metric. The prior bearish OEX Put/Call Ratio (smart money) has shifted to a neutral 1.39 while the Total and Equity Put/Call Ratios (contrary indicators) saw a lift in crowd put buying resulting in respective bullish signals of 1.12 and .74. The WST Ratio and its Composite are neutral at 42.5 and 120.4. As such, we believe the data has an ever so slightly positive inclination for the short term at this time.
- In conclusion, we suspect the very near term may see some sideways trade or bounce while the intermediate term continues to be of concern as the forward valuation for the SPX remains near a decade high at 16.8X and investor psychology continues to display complacency. The combination suggests to us that intermediate term risk generally outweighs reward for the markets in general.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.95% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.81 versus the 10 Year Treasury yield of 1.85%.
SPX: 2,067/2,115
DJI: 17,827/18,204
COMPQX: 4,898/???
DJT: 8,647/9,002
MID: 1,496/1,540
RUT: 1,249/???