McClellan OB/OS Neutral
Opinion: The indexes closed mostly lower Thursday with the exception of the DJT that closed fractionally higher. Volumes declined while breadth was generally negative. None of the moves were of any magnitude. As such, the short term downtrends remain intact. The data is a mixed bag with the OB/OS Oscillators neutral in each case. We remain cautious for the near term while leverage, poor breadth and valuation remain concerns for the more intermediate term.
- On the charts, no major technical events occurred during Thursday’s lackluster trade. All of the short term downtrends remain intact while the RUT (page 4) closed back below its 50 DMA. While the stochastic levels are struggling to recover, we see no other technical aspects to suggest the current downtrends are about to reverse.
- The data is a mixed bag as sentiment is split. The new AAII Bear/Bull Ratio (contrary indicator) now shows more bears than bulls at 35.09/22.61 as 0f 7/2. However, the Rydex Ratio (contrary indicator) still shows the leveraged ETF traders overly optimistic and leveraged long at 61.3. And while the OEX Put/Call Ratio (smart money) at .49 shows the pros very long calls and expecting a bounce, all of the McClellan OB/OS Oscillators remain neutral (NYSE:-18.38/-45.29 NASDAQ:-45.24/-30.47) with no oversold conditions requiring relief. We would also note that insiders measured by the Gambill Insider Buy/Sell Ratio at 10.7 are nowhere near the buying window. In fact, they have slightly increased their selling activity.
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- In conclusion, we see nothing from the charts or data at this stage that would suggest a high probability of a shift from the current near term downtrends of the indexes. Margin debt which is up 14% on a y/y basis, poor market breadth and a 16.6X multiple on forward 12 month earnings estimates for the SPX keep us cautionary for the intermediate term as well.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.02% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.04 versus the 10 Year Treasury yield of 2.39%.
SPX: 2,053/2,091
DJI: 17,586/17,890
COMPQX: 4,935/5,049
DJT: 7,987/8,306
MID: 1,496/1,527
RUT: 1,242/1,273