DJT Closes Back Above 50 DMA
Opinion: The indexes closed higher yesterday with positive internals and slightly higher volumes. However, some of the short term data are now on warning signals implying caution while the intermediate term remains a concern for reasons discussed below.
- On the charts, there were two positive events as a result of yesterday’s action as the DJT (page 3) closed back above its 50 DMA while the MID (page 4) closed above resistance and near a new high. So there were some improvements. However, we would note that the stochastic levels for all of the indexes, with the exception of the DJI (page 2), are now overbought. We reiterate that the stochastic data should be used only for confirmation purposes as they can stay overbought for extended periods. Nonetheless, they do cast a bit of a shadow over the short term.
- Also, as noted yesterday, our suspicion that the DJT may be forming a topping pattern is now joined by concerns for the same issue for the COMPQX, DJI and SPX. It is too early to make a definitive call at this point but worthy of monitoring, in our opinion. We would also note what we consider to be poor action in the financial sector that also is worth watching.
- On the data, the McClellan OB/OS Oscillators are all neutral (NYSE:+47.79/+22.86 NASDAQ:+13.41/-20.65) along with the Equity Put/Call Ratio at .66. However, the WST Ratio and its Composite (69.6/166.4) are on bearish signals along with a very bearish level coming from the OEX Put/Call Ratio (smart money) at 2.06. Although we never put too much faith on one indicator, the fact that the pros are betting heavily on some downside action should be acknowledged. Finally, the Rydex Ratio (contrary indicator) shows the leveraged ETF traders persisting in their heavily leveraged long bets. So the short term has taken on a somewhat darker tone by our work.
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- For the intermediate term, shrinking forward 12 month earnings estimates for the SPX leaving its forward p/e at the top end of a decade range at 16.5X leads us to the opinion that valuation via that metric is stretched and vulnerable to adjustment.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.06% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.62 versus the 10 Year Treasury yield of 1.83%.
SPX: 2,021/2/072
DJI: 17,507/17,900
COMPQX; 4,600/4,771
DJT: 8,782/9,184
MID: 1,411/1,468
RUT: 1,154/1,199