More Bearish Stochastic Crossovers
Opinion: The futures are implying a broadly negative open this morning. As such, we believe it likely the support levels of the respective indexes may be broken. Friday’s action saw further deterioration internally although not communicated by the index charts as no violations were created. Volumes were notably higher, however, with negative internals suggesting further selling pressure in spite of the indexes closing mixed on the day. The data remains mixed but a few more cautionary signals are now seen while more bearish stochastic crossovers were triggered on the charts. As such our neutral./negative short term outlook has turned more negative while we remain cautionary for the intermediate term.
- On the charts, the most notable event on Friday was the significant surge in trading volume as internals were negative, implying further distribution. The indexes masked the deterioration as they closed mixed on the day. While no supports were violated, both the COMPQX (page 3) and RUT (page 4) saw bearish stochastic crossover signals generated, sending another warning. We would also note the NASDAQ A/D closed below its 50 DMA adding to the internal erosion.
- As well, the yield on the 10 year Treasury closed at 2.48%, testing resistance and closing above its long term downtrend line implying the possibility of yet higher yields that could prove troublesome for equities.
- The data remains a mixed bag with all of the McClellan OB/OS Oscillators remaining neutral (NYSE:-28.67/-41.1 NASDAQ:-16.82/-1.12). As the crowd has become more nervous as shown by the Total and Equity Put/Call Ratios (contrary indicators) seeing increased put buying at 1.06 and .74, the pros have switched back to their prior bearish bets and are now heavy puts as well with a 1.85 OEX Put/Call Ratio (smart money).
- What could prove to be the more troublesome data point is the margin debt level that is up 16% y/y. Should the chart supports break, we may find ourselves in a situation where forced margin selling could escalate. There is no assurance of such an event. However, the elevated margin levels do present that possibility, in our opinion.
- So we have turned more negative for the short term while remaining cautious for the intermediate term due to sentiment, valuation, poor breadth and leverage.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.96% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.33 versus the 10 Year Treasury yield of 2.48%.
SPX: 2,073/2,125
DJI: 17,840/18,165
COMPQX: 5,047/???
DJT: 8,242/8,566
MID: 1,530/???
RUT: 1,258/???