Sentiment Remains On Green Lights
Opinion: Our next commentary will be on Tuesday, September 6. All of the indexes closed higher yesterday with positive internals on heavy volume, although lower than the prior down session. All closed at or near their intraday highs. No technical events of note occurred on the charts while some of them are now approaching what we believe to be short term downtrend lines that have yet to be violated. Sentiment levels have been driven to such extremes that they are causing us to become neutral/positive for the short term as the intermediate term outlook becomes more encouraging given the adjustments in valuation and sentiment.
- On the charts, all of the indexes closed higher with positive breadth and at or near their highs of the day. While volumes declined from the prior down session, they remained relatively strong. Several of the charts (pages 2-4) are now approaching what we suspect are their short term downtrend lines that are not yet violated. Given the current state of the oscillators and sentiment, we suspect said downtrends have a reasonable probability of being violated to the upside over the near term.
- Looking at the data, all of the McClellan OB/OS Oscillators are neutral with the exception of the oversold 21 day NASDAQ (NYSE:+14.21/-47.11 NASDAQ:+25.98/-58.23). Sentiment levels remain extremely positive in their projections as the crowd continues its newfound bearish outlook while insiders remain very heavy buyers of their stock. The new Investors Intelligence Bear/Bull Ratio (contrary indicator) at 26.8/27.8 now sees the highest number of bears and lowest number of bulls over the past year while the Total and Equity Put/Call Ratios (contrary indicators) show the crowd still heavy in puts at 1.31 and .73 respectively. The detrended Rydex Ratio (contrary indicator) shows the leverages ETF Traders at their most bearish since Q4 of 2008. Insiders, in contrast, continue to be heavy buyers at current levels with a very bullish 73.3 Gambill Insider Buy/Sell Ratio. As such, sentiment levels are about as encouraging as we could hope to see.
- In conclusion, we remain of the opinion that the markets are likely in a bottoming process. The SPX forward p/e dropping to 15.4 and shift in sentiment leave us neutral/positive short term and positive intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.47% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.16 versus the 10 Year Treasury yield of 2.19%.
SPX: 1,868/1,990
DJI: 15,884/17,061
COMPQX; 4,526/4,842
DJT: 7,455/7,981
MID: 1,350/1,434
RUT: 1,096/1,172