Intermediate Term Outlook Turns Positive
Opinion: All of the indexes closed lower yesterday with broadly negative internals and heavy trading volumes on both exchanges. All of the indexes closed near their intraday lows with two of them closing below support. However, sentiment data has reached extremes to those typically seen near market lows. As such, although the short term may continue to be volatile, the significant shift in sentiment now causes us to change our intermediate term outlook to positive for the first time in several months. Our near term outlook is neutral/positive.
- On the charts, all of the indexes closed lower yesterday in heavy trading and broadly negative internals. Both the DJI (page 2) and COMPQX (page 3) closed below near term support that we had lifted post the prior session. While selling was intense, we are of the opinion that the declines are part of a bottoming process purging the excesses from the prior highs. And while the possibility of lower lows or a retest of the recent lows exists, we continue to be of the opinion that current levels pose more of a buying than selling opportunity.
- Part of that view comes from some very extreme sentiment data. Everyone hates the markets now, except insiders who continue to buy at levels typically seen near market lows as noted by the very bullish Gambill Insider Buy/Sell Ratio at 103.4.
- In sharp contrast, the crowd that has typically been an excellent contrarian indicator now hates the market versus their rabid enthusiasm of a few weeks ago. The detrended Rydex Ratio (contrarian indicator) shows the leveraged ETF traders at their most bearish attitude since Q4 of 2008 during the financial meltdown. The markets did not see their final low until the following quarter, but the rally from that point was substantial in both magnitude and length. The Total and Equity Put/Call Ratios (contrary indicators) show the crowd remaining heavy in puts at 1.24 and .74 as well as the ISEE Put/Call Ratio (contrarian/international) at a significant -21.9. And while the 1 day McClellan OB/OS Oscillators are neutral (NYSE:-30.46 NASDAQ:-10.31) the 21 day levels are now oversold (NYSE:-63.72/NASDAQ:-69.99).
- In conclusion, while the markets may still see some volatile chop over the near term during what we suspect to be a bottoming process, valuation and sentiment are telling us to become more positive for the intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.6% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.35 versus the 10 Year Treasury yield of 2.17%.