Short Term Positive/Intermediate Term Neutral
Opinion: All of the indexes closed lower yesterday with very negative internals and heavy trading volumes. While the charts have finally seen a severe break to the downside as prior internals and valuation were suggesting, we are now of the opinion that the lion’s share of selling has been expressed to the point where our near term outlook is now positive while the intermediate term outlook has improved from cautious to neutral due to the adjustments in valuation and sentiment.
- On the charts, the past three sessions have essentially given up the last years’ worth of gains as the SPX tested the October 2014 lows yesterday. While all of the charts are in a vertical decline, the massiveness of the negative internals yesterday suggests a tossing in of the towel by sell stricken traders. There were 22 times as many decliners versus advances on the NYSE while up volume was almost nonexistent during the extremely heavy trade. NASDAQ internals were very similar. Such statistics are typically associated with selling panics. As well, the stochastic levels on all of the indexes (see charts) are now extremely oversold suggesting some bounce potential. As such, we believe the charts imply a rally to their new resistance levels (listed below) over the near term.
- The data is largely bullish with all of the McClellan OB/OS Oscillators oversold. In fact, the one day levels are the most oversold in the last 2 years (NYSE:-156.45/-70.5 NASDAQ:-135.88/-95.47). The crowd is very long puts with a .87 Equity and 1.28 Total Put/Call Ratio (contrary indicators). In contrast, insiders have been actively buying their stock as noted by the bullish 35.7 Gambill Insider Buy/Sell Ratio. Finally, the WST Ratio and its Composite are both bullish at 19.3 and 81.8 and on a bull alert signal. So the data is suggestive of some near term strength.
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- In conclusion, we suspect the markets have put in a near term bottom likely to see some reflexive bullish action. Our intermediate term view has now shifted from cautious to neutral as the drop in the indexes has pulled the forward p/e for the SPX down to a more reasonable level of 15.0X forward 12 month estimates versus the prior high 17X valuation while sentiment levels have improved.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.67% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.35 versus the 10 Year Treasury yield of 2.0%.
SPX: 1,874/1,972
DJI: 15,868/16,455
COMPQX; 4,362/4,570
DJT: 7,339/7,729
MID: 1,355/1,408
RUT: 1,096/1,153