McClellan OB/OS Oscillators Remain Overbought
Opinion
The futures are implying a strong open this morning but we cannot shake the feeling that the recent rally may be nearing its peak based on internal volume characteristics, overbought conditions, deterioration in psychology and near term valuations.
- On the charts, most of the indexes closed higher on the day with the DJT (page 3) being the outlier as it closed lower and below its nearly vertical uptrend line. The weakness in the DJT may not be “significant” but we would note it was the index that lead the recent rally. Thus, it may be the first to see its short term peak. Today’s action in the DJT will give better insight as to whether or not this is the case. The SPX (page 2) closed above resistance while the COMPQX (page 3) and RUT (page 4) closed just below their resistance levels that will likely be broken on the open.
- Our only other observation worthy of note was the decline in trading volumes once again as the markets advanced. We mention it only because we saw similar volume activity prior to the correction at the beginning of the month.
- Looking at the data, there are several points of concern, in our opinion. The McClellan OB/OS Oscillators are mostly overbought with the NYSE 1 day extremely so at +101.54. Its 21 day is an overbought +54.17 with the NASDAQ 1 day overbought at +97.26. Its 21 day is a neutral +34.34. So the OB/OS suggest a significant drop in “fuel” to carry the markets higher. The WST Ratio and its Composite are on glaring red lights at 67.3 and 277.3 while the Equity Put/Call Ratio has turned to a neutral .58.
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- Psychology has deteriorated as the “crowd” has quickly forgotten its recent sufferings with a very cautionary 56.8 Rydex Ratio (contrary indicator) and the new AAII Bear/Bull Ratio (contrary indicator) turning negative to 21.07/49.37.
- Although not a “technical event”, we believe valuation is again a concern as forward 12 month EPS estimates for the SPX that have recently declined to $127.58 from $129.05 leaves the forward P/E at a decade high of 15.6X. So although the SPX is near its prior high, it is now more expensive than prior to the correction.
- In conclusion, we remain nervous regarding the short term market prospects.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.4% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.58 versus the 10-Year Treasury yield of 2.3%.
- S&P 500: 1,950//1,985
- Dow 30: 16,898/?
- NASDAQ Composite: 4,426/4,565
- Dow Jones Transportation: 8,484/?
- S&P Midcap 400: 1,367/1,412
- Russell 2000: 1,119/1,157