Intermediate-Term Cautious
Opinion
The indexes closed mixed yesterday with very little price change in either direction with the exception of the DJT. Most traded within very tight ranges as internals were mixed as well. The NYSE had positive breadth but negative up/down volume while the NASDAQ had negative breadth with positive up/down volume. No important technical signals were generated while the data is largely unavailable this morning. As such, we are now inclined to see the short term outlook as neutral while market breadth, sentiment and valuation keep us cautious for the intermediate term.
- On the charts, most of the indexes decided to take the day off as they saw little change in price from the prior session within a tight intraday range. The one exception was the DJT (page 3) closing higher on the day. There were no major technical signals generated other than “doji” candlesticks appearing on the DJI (page 2), COMPQX (page 3) and MID (page 4). Dojis are formed when an issue or index opens and closes very close to or at the same level within the session. Standard technical theory states that such action is a sign of market confusion that usually results in the pause or completion of the prior trend which, in this case, was up. We would not place a great deal of weight on these signals however as their accuracy is debatable, in our opinion. Yet their appearance does tilt the scale slightly toward neutral projections.
- There is no data available this morning which we find quite frustrating. However, given the lack of action yesterday, we suspect there was little change. Our major issues remain that of very poor breadth, for the markets as a whole that suggests a fairly high level of risk over the intermediate term. We have talked about the weak A/D lines within the exchanges for quite some time now. Just recently, this was noted in a Forbes article stating that five companies within the entire SPX “have collective returns that account for more than the entire return of the index year-to-date”. In fact, if those five stocks were excluded, the SPX would be down 2.2% this year. Stepping away from the SPX, the other indexes look notably weaker. Similar action was seen in the late 90s and the “nifty fifty” period in the 70s.
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- In conclusion, while the near term outlook may be neutral/positive in nature, breadth, valuation and complacency suggest to us the markets are on shaky ground for the more intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.04% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.74 versus the 10-year Treasury yield of 2.25%.
- SPX: 2,020/2,102
- DJI: 17,150/17,903
- NASDAQ; 4,923/5,123
- DJT: 7,895/8,330
- MID: 1,394/1,480
- RUT: 1,145/1,180