RUT Violates Resistance
Opinion: The indexes closed mostly higher yesterday with the exception of the DJT. Internals were positive on both exchanges as volumes increased from the prior session. Advances were modest but recovered from early trading weakness. We remain neutral for the short term given the current status of the charts and data while cautious on the more intermediate term outlook given weak market breadth and valuation.
- On the charts, most of the indexes managed to post modest gains yesterday as they recovered from early session weakness responding to the downing of a Russian fighter jet. On the positive side, the RUT (page 4) did manage to close above its short term resistance as the rest remain confined to their current trading ranges. The DJT (page 3) was the exception as it closed lower on the day while also flashing a bearish stochastic crossover signal. Most of the other indexes are overbought on their stochastic readings at this point but have yet to follow the DJT. The last signal of this sort given by the DJT did see the rest of the indexes follow shortly thereafter. However, this has yet to transpire. As such, the rest of the resistance levels remain intact which, in our view, implies neutral near term action.
- The data remains largely neutral as well, including all of the McClellan OB/OS Oscillators (NYSE:+18.76/+2.5 NASDAQ:+31.61/+0.96). The OEX Put/Call Ratio (smart money) is bearish at 1.74 with the pros long puts and expecting weakness. However, the prescience of this indicator has been wanting of late and, as such, may be declining in its significance.
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- In conclusion, with resistance levels intact and the OB/OS in neutral territory, we suspect the near term outlook is one of some further sideways action. For the intermediate term the breadth of the market with few large-cap weighted stocks carrying the indexes higher as the rest languish or decline remains a concern along with the 16.6X forward P/E for the SPX that remains near the peak of its decade long range.
- 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 2.24%.
SPX: 2,020/2,102
DJI: 17,150/17,903
COMPQX; 4,923/5,123
DJT: 7,895/8,330
MID: 1,394/1,465
RUT: 1,145/1,200