Psychology Turns More Cautionary
Opinion
The majority of the indexes closed higher yesterday with the exception of the COMPQX closing lower. Internals were positive as volumes rose from the prior session. While the charts remained fairly unaffected with one positive technical event, the psychology data has now risen to the point we feel worthy of greater consideration. Its cautionary signals have intensified enough to shift our short term outlook to “neutral/negative” from our prior “neutral” opinion. Extended valuation keeps us “neutral” for the more intermediate term.
- On the charts, again, the only index closing lower on the day was the COMPQX (page 3) that closed below its intermediate term uptrend line in the prior session. Internals were positive on both exchanges as volumes rose from the prior session. The one technical event of note was the VALUA (page 5) closing above its near term resistance. However, all of the large-cap indexes remain on bearish stochastic crossover signals.
- Although the charts remain largely constructive, the psychology data has moved to the point where some yellow flags need to be acknowledged. Of greatest significance, in our opinion, is the intensification of insider selling activity that has pushed the Gambill Insider Buy/Sell ratio to a very bearish 4.7. It shows insiders selling with greater intensity than just prior to the August and December corrections of last year. The “crowd” measured by the Equity Put/Call Ratio (contrary indicator) now finds them heavy in calls at 0.53 while the Rydex Ratio (contrary indicator) remains stretched with the leveraged ETF traders very leveraged long at 58.3. The new Investors Intelligence Bear/Bull Ratio (contrary indicator) echoes the same message as bullish advisors are more than double the bears at 20.6/44.3. Finally, the OEX Put/Call Ratio (smart money) shows the pros very weighted in puts at 2.37 and expecting weakness.
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- In conclusion, although the charts have yet to show important sell signals, we believe market psychology has darkened enough to warrant some degree of caution, thus our near term outlook is now “neutral/negative”.
- For the intermediate term, we remain “neutral” as the forward 12 month p/e based on IBES forward 12 month earnings estimates has lifted to a 16.9 multiple and just shy of the level seen prior to the January correction.