MID Violates Resistance
Opinion: The indexes closed mostly higher Friday with mixed internals on the NYSE and positive internals on the NASDAQ. Volumes were light in the abbreviated session. The MID followed the RUT’s prior close above resistance while the rest of the indexes showed little change. Given the current state of the charts and data, we view the near term outlook to be neutral/positive although some warning signs are present. Valuation remains a concern for the more intermediate term.
- On the charts, most of the indexes closed higher Friday with the DJI (page 2) being the only loser. The MID (page 4) closed above short term resistance, following the footstep of the RUT (page 4) during the prior session. It is worth noting, in our opinion, that the prior negative trend in the NASDAQ A/D has improved as it has now made a higher high, thus confirming the action in the MID and RUT. The SPX (page 2) remains in a short term sideways pattern along with the DJI, DJT (page 3) and COMPQX (page 3). However, while the RUT and MID have improved and are in short term uptrends, we now find all of the stochastic levels in overbought territory with the exception of the DJT. While no bearish crossovers have been triggered, their current status should be watched closely.
- The data continues to send mixed messages resulting in no strong directional implications. The NASDAQ 1 day McClellan OB/OS is overbought at +64.41 but the rest are neutral along with the latest AAII Bear/Bull Ratio at 26.0/32.4. And while the Total and Equity Put/Call Ratios (contrary indicator) show the crowd long puts and nervous at 1.12 and .76, the OEX Put/Call Ratio (smart money) has the pros very heavy puts at 3.11, thus balancing the scales. As such, the data has no strong consensus at this point.
- In conclusion, the current short term trends remain intact with the large caps trading sideways while the small and mid-cap indexes are positive. Unless we see some breaks of trend or the stochastic signals tuning negative, we believe the current trends will remain in force over the near term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.02% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.84 versus the 10 Year Treasury yield of 2.23%.
SPX: 2,044/2,102
DJI: 17,468/17,903
COMPQX; 4,978/5,130
DJT: 7,895/8,330
MID: 1,444/1,486
RUT: 1,145/1,202