Small Caps Remain Weak
Opinion
The late afternoon drop in the markets yesterday had little impact on the technical picture of the charts that remain sideways to positive for the most part. The data remains mostly neutral with some outlying bullish and bearish signals. As such, although our short term outlook for the past two sessions expecting some progress was not to be seen, the charts and data continue to imply some sideways to positive action for the bulk of the indexes over the near term.
- On the charts, breadth and up/down volumes turned negative mid-afternoon as sellers came in with enough force to close the indexes near their lows of the day, not what we expected. Yet most of the charts held their technical ground. The SPX, DJI and DJT (pages 2&3) remain in their up trends while both the COMPQX (page 3) and MID (page 4) remained above their prior downtrend lines and support.
- The RUT (page 4), which has suffered the most over the past few weeks, was not as fortunate. It closed back below its downtrend line as well as near term support that is now adjusted to 1,096 that is also near the “hammer” intraday low of 5/7. “Hammer” intraday lows are typically regarded as important support levels via standard technical analysis theory. So although the RUT is back in its downtrend, we have some reason to expect new support to hold. The net picture is the SPX, DJI and DJT remain in their up trends while the COMPQX and MID are sideways as the RUT struggles to hold support.
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- On the data, the WST Ratio and Composite are both neutral (39.4/124.9) along with 3 of the four McClellan OB/OS Oscillators as the NYSE 21 day remains overbought at +69.73. The put/call ratios are sending opposite signals as the Equity and Total Put/Call Ratios (contrarian indicators) show the crowd to be nervous active put buyers at 1.08 and .72 respectively, thus actually sending a bullish signal. However, they are neutralized as the pros measured by the OEX Put/Call Ratio (smart money) are active put buyers as well at 1.85. So, all the options players are betting on some near term weakness. Thus the message from the data is fairly evenly balanced and not giving any strong signals regarding near term probabilities.
- For the longer term, we remain bullish on equities as they remain undervalued with a 6.56% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.93 versus the 10 Year Treasury yield of 2.54%.
- SPX: 1,867/?
- DJI: 16,331/?
- NASDAQ: 4,028/4,175
- DJT: 7,550/7,773
- MID: 1,350/1,390
- RUT: 1,095/1,130