Remaining Short-Term Neutral

Some Near Term Resistance Levels Breached

Opinion

All of the indexes closed higher but, for the most part, gains were minimal. NYSE internals were positive but NASDAQ internals were mixed as down volume exceeded up volume on that exchange. While some near term resistance levels were breached, further overhead supply is just ahead, thus muting the technical importance, in our opinion. The data is largely neutral as well. As such, we remain near term neutral in our outlook for the indexes. Breadth, valuation, leverage and sentiment keep us cautious for the intermediate term.

• On the charts, the SPX (page 2), DJI (Page 2) and MID (page 4) all managed to close above their resistance levels yesterday. The DJI also closed above its 50 DMA. However, the new resistance levels are close enough that yesterday’s achievements are not quite as notable as might otherwise be the case. The COMPQX (page 3) tested resistance but failed while the RUT (page 4) formed a “doji” candlestick suggesting a pause in its recent progress. As such, the charts appear neutral at this point. We do continue to see poor breadth on the SPX that, given its gains of the past two sessions, still finds only 45.6% of its components above their 50 DMAs. Breadth remains poor.

• Looking at the data, it is largely neutral including all of the McClellan OB/OS Oscillators (NYSE:-19.96/-15.04 NASDAQ:+14.58/+10.64). The Total and Equity Put/Call Ratios (contrary indicators) are neutral as well at .84 and .59. However, the OEX Put/Call Ratio (smart money) has slipped back into bearish territory at 1.5 suggesting the pros are becoming a bit more anxious for the near term. So the data is fairly evenly split with the slightest of cautious signals coming from the OEX Put/Call levels.

• For the short term, we remain neutral in our market expectations. The intermediate term is still a concern as the forward p/e for the SPX based on 12 month forward IBES earnings estimates remains elevated at 16.8X, market breadth remains far from inclusive and leverage increasing 16% on a year over year comparison imply risk may well outweigh reward for that timeframe.

• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.95% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.42 versus the 10-year Treasury yield of 2.38%.
• S&P 500: 2,073/2,121
• US 30: 17,698/18,168
• NASDAQ Composite: 5,015/5,100
• Dow Jones Transportation: 8,242/8,607
• S&P Midcap 400: 1,500/1,540
• Russell 2000: 1,239/1,273