Volumes Decline Again On Advance
Opinion: All of the indexes closed higher yesterday with a couple of chart improvements. However, volumes declined again on the gains which continues to keep the recent rally questionable, in our view. Multiple resistance levels were tested and failed. Meanwhile, the data remains slightly negative with the pros betting heavily on some weakness while breadth remains questionable and valuation stretched from a historical perspective. As such, we are short term neutral/negative and cautious for the intermediate term.
- On the charts all of the indexes advanced yesterday but volumes shrank again. The SPX (page 2) closed above resistance that is now adjusted to 2,121. We would reiterate our concern that with the SPX, just shy of a new high, has just over half (56%) of its components are trading above their 50 DMAs implying poor internal breadth. The MID (page 4) closed above its 50 DMA but the DJI (page 2), COMPQX (page 3), DJT (page 3) and MID all tested resistance and failed. So although there were two improvements, the overall chart picture, in our view, remains tenuous for the near term.
- On the data, all of the McClellan OB./OS Oscillators remain neutral (NYSE:-27.68/+24.2 NASDAQ:-27.81/-1.5). Caution is being expressed by the Equity Put/Call Ratio (contrary indicator) at .55 showing the crowd chasing calls while the OEX Put/Call Ratio (smart money) shows the pros have backed up the truck in put buying at an extremely bearish 3.64 as they bet heavily on expected near term weakness. The Rydex Ratio (contrary indicator) still shows the leveraged ETF traders near peak levels of leveraged long exposure at 69.9. As such, we believe the data is slightly negative at this point.
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- Valuation is still troublesome for us as the SPX forward p/e of 17.2X forward 12 month IBES earnings estimates remains at a decade high. We would also note the yield on the 10 year Treasury is very close to breaking out that would also add to intermediate term concerns.
- In conclusion, we remain of the opinion n that the near term outlook for the markets is neutral/negative while the intermediate term remains cautionary.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.8% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $122.74 versus the 10 Year Treasury yield of 2.14%.
SPX: 2,073/2,121
DJI: 17,827/18,108
COMPQX: 4,919/5,028
DJT: 8,541/8,802
MID: 1,495/1,523
RUT: 1,216/1,252