McClellan OB/OS Remain Oversold
Opinion: All of the indexes closed lower yesterday with broadly positive internals as volumes rose on the NYSE but remained essentially flat on the NASDAQ. All of the indexes closed at or near their highs of the day. A few positive chart signals were generated while the data remains heavily weighted to bullish signals. As such, we remain short term positive for the indexes and neutral for the more intermediate term.
- On the charts, all of the indexes rose with strong internals and near their intraday highs. A few positive signals were triggered as the COMPQX (page 3) closed above near term resistance while it and the DJI (page 2) flashed bullish stochastic crossover signals. The remaining indexes are still very oversold on their respective stochastic levels. The strong breadth combined with good volumes and closes near the highs imply strong buying interest and suggest, in our opinion, some further near term upside remains.
- The data remains quite bullish as the McClellan OB/OS Oscillators, although not extremely so, remain oversold (NYSE:-69.52/-55399 NASDAQ:-53.46/-76.51) implying more bounce potential exists. The options data remains extremely positive as well as the crowd remains very heavily weighted in puts with 1.04 Total and .85 Equity Put/Call Ratios (contrary indicators). The ISEE Put/Call Ratio (contrarian/international) is also very heavy in puts at -26.8 while the OEX Put/Call Ratio (smart money) shows the pros heavy in calls at 0.58. The Gambill Insider Buy/Sell ratio remains a very bullish 52.9 while the Rydex Ratio (contrary indicator) shows the leveraged ETF traders have become more nervous as it slipped down to 42.4. Finally, the Investors Intelligence Bear/Bull Ratio (contrary indicator) shows advisors at their lowest level of bullish sentiment in almost a year at 22.5/31.6. So the data is nothing but green lights at this point.
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- In conclusion, the weight of the evidence suggests to us some near term upside remains for the indexes while the drop in the forward p/e for the SPX based on IBES forward estimates to 15.4X versus its prior 17.0X leaves valuation at more reasonable levels resulting in a neutral intermediate term view.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.51% 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%.
SPX: 1,868/1,972
DJI: 15,360/16,455
COMPQX; 4,500/4,749
DJT: 7,339/7,729
MID: 1,339/1,408
RUT: 1,096/1,153