Data Remains Largely Neutral
Opinion
Friday’s action saw some dramatic intraday reversals to the upside as all of the indexes closed higher and at or near their highs of the day. Breadth was positive as volumes rose above those of the prior session. The net result was some tests of resistance on the charts with some other positive chart events while the data remains largely neutral. We now suspect the near term will see some violations of resistance and tests or violations of current downtrend lines. But as the near term looks more positive, the intermediate term remains neutral, in our opinion, until the A/D lines of the exchanges reverse their current downtrends.
- On the charts, the early swoon saw a dramatic intraday reversal with the DJI traveling over 450 points on an intraday basis. The SPX (page 2) closed above its downtrend line from mid-August and closed on resistance. The DJI (page 2) DJI closed on resistance as well but has yet to break above its downtrend line. All of the indexes closed near their intraday highs with strong volume and breadth adding to the credibility of the move. The DJT (page 3), MID (page 4) and RUT (page 4) all saw bullish stochastic crossovers. Given that the large cap indexes had such significant recoveries, we believe there is a probability that the other indexes may see some follow-through and test technical levels as well over the relatively near term.
- The data is largely neutral including the McClellan OB/OS Oscillators (NYSE:+31.22/-9.82 NASDAQ:+5.55/-29.69). The same can be said for the Equity and OEX Put/Call Ratios at .67 and 1.08 respectively. The Total Put/Call Ratio (contrary indicator) remains at a bullish reading of 1.09 while the Rydex Ratio (contrary indicator) remains neutral at 29.1. As such the data is not very instructive but, at the same time, does not present any notable headwinds to restrain further near term progress.
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- In conclusion, we believe the indexes will see some further strength over the near term as they follow the lead of the large cap SPX and DJI. However, the longer term A/D trends for the exchanges remain in downtrends and need violations of said trends in order for us to become more constructive for the intermediate term outlook.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.46% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.11 versus the 10-year Treasury yield of 1.99%.
- SPX: 1.872/1,950
- DJI: 16,000/16,473
- NASDAQ; 4,581/4,776
- DJT: 7,665/8,058
- MID: 1,350/1,400
- Russell 2000: 1,083/1,148