McClellan OB/OS Oscillators Neutral
Opinion
Friday’s decline in the equity markets on lighter volume did not have a great deal of impact on the data. However, there were a few more negative signs on the charts. The net result is, given the current status of the charts and data, we continue to have some concerns regarding the near to intermediate term outlook for the major equity indexes.
- On the charts, as we have been seeing over the past several weeks, the large cap indexes held their ground while the small and mid-caps continue to display relative weakness. Decliners outpaced advancers by a wide margin as did down volume over up volume while overall volumes declined. The SPX (page 2) did follow the doji signal mentioned in the prior report by declining while the DJI (page 2) managed to hold on to its near term support and uptrend line.
- However, the RUT (page 4) fell back below its 50 DMA while the MID (page 4) may be forming a “head and shoulders” formation as noted on its chart. It is too early to make the MID call with a high degree of confidence. Yet the pattern is suggestive and will be monitored closely. Should it play out, it would cast another important shadow over the markets, in our opinion. The NASDAQ Advance/Decline remains in the unfavorable state of trading below its 50 and 200 DMAs while making a lower high and lower low. Breadth remains a concern.
- On the data, most of it remains neutral. However, the fact that the McClellan OB/OS Oscillators remain neutral after Friday’s drop (NYSE:-47.97/+3.03 NASDAQ:-44.42/-37.57) could be taken as a sign that the short term weakness has not been exhausted resulting in oversold conditions. Sentiment remains an issue as the pros measured by the OEX Put/Call Ratio (smart money) are heavy puts at 1.65 and expecting weakness while the detrended Rydex Ratio (contrary indicator) remains leveraged long at 1.65 showing the crowd to be overly bullish.
- In conclusion, Friday’s action combined with the current data levels continues to suggest some caution remains warranted over the near term for the major equity indexes.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.38 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.21 versus the 10 Year Treasury yield of 2.47%.