Data Neutral/Negative
Opinion
The markets closed mixed yesterday with little price change as internals came in slightly negative with volumes declining from the prior session. While most of the indexes remain in their uptrends on the charts, the SPX did close below its uptrend suggesting a possible shift for that index. The data is largely neutral with a few negative exceptions. With valuation remaining a concern for us, the data combined with the SPX action and extended nature of the rally suggests some likely sideways action over the near term.
- On the charts, the large cap indexes closed fractionally lower yesterday while the mid and small-cap stocks closed slightly higher along with the DJT. The only technical event of note was the SPX (page 2) closing below its short term uptrend line. While this does not necessarily imply a downside reversal, breaks of such trends do tend to imply at least some sideways movement before the trend either resumes or fails.
- The SPX and DJT (page 2) also saw candlestick “doji” formations appear as both opened and closed near the same levels after some intraday movement. Such formations appearing after a significant trend tend also to imply a pause, at a minimum. However, we would need to see breaks below support for the technical trends to turn negative. Yet, given the extent of the recent rally, some consolidation would be far from unusual. Without breaks of trend or bearish stochastic crossovers, it is too early to make that assumption, in our opinion.
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- The data is largely neutral including all of the McClellan OB/OS Oscillators (NYSE:+16.52/+47.25 NASDAQ:+29.63/+14.74). There is a negative signal coming from the WST Ratio and its Composite that are both bearish at 73.0 and 156.1. Possibly of greater import is the new AAII Bear/Bull Ratio (contrary indicator) that now shows the crowd with twice as many bulls versus bears at 20.59/40.39. This overweighting of bullish sentiment on the crowd’s part post a significant rally which was initiated with very bearish opinions on their part is always a cause of some concern for us. They are quite regularly overly bearish at bottoms and overly bullish at tops. We view their recent reversal to highly bullish opinions as a cautionary signal.
- In conclusion, while the SPX forward P/E of 16.8X is expensive, in our view, we have yet to see signals of an impending market correction we believe is likely.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.97% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.26 versus the 10-year Treasury yield of 2.25%.
- SPX: 2,022/2,113
- DJI: 17,566/18,033
- NASDAQ; 4,923/5,144
- DJT: 8,034/8,330
- MID: 1,445/1,480
- Russell 2000: 1,162/1,193