Some Sentiment Data Becomes Cautionary
Opinion
Our next report will be on Wednesday, August 27th. The markets closed mostly higher with the exception of the DJT yesterday as some technical improved. Yet the general lack of healthy volume and debatable market breadth within the recent rally continues to disturb us as we suspect said internal weakening may imply a weak rally from the prior correction lows trapping longs that have been programed to by all dips. We suspect the internals suggest actual institutional buying interest has waned. Meanwhile, some sentiment data is once again becoming cautionary.
- On the charts, there were several improvements as of yesterday’s close. The SPX (page 2) closed above resistance and made a new closing high. The DJI (page 2) closed above resistance now adjusted to 17,052. The RUT (page 4) closed back above its 50 DMA. While the COMPQX (page 3) made a new marginal 14 year high, the chart notes its advance was once again stalled by its return line that ended the June rally. Its trend is up but the return line suggests caution, in our opinion. The DJT (page 3) was the only index closing lower on the day as it failed to exceed its resistance that was tested on an intraday basis. Stochastic readings remain extremely elevated.
- On the data, the 1 day NYSE McClellan OB/OS Oscillator is the only one overbought at +76.99. The rest are neutral. And while the OEX Put/Call Ratio (smart money) is a mildly bullish .92, other sentiment data has become cautionary. The Rydex Ratio (contrary indicator) shows the leveraged ETF traders are again overly bullish at 54.5 now that the markets have rallied. The Equity Put/Call Ratio (contrary indicator) is sending a similar message as the crowd is now heavy calls at .51. Finally, the new AAII Bear/Bull Ratio (contrary indicator) also shows the crowd a bit overly confident at 23.6/46.11 now that the DJI has bounced 600 points from the correction low. These are not glaring red lights, in our opinion, but do suggest sentiment has become somewhat extended once again.
- In conclusion, while we have been frustrated watching the markets advance post the correction lows, the possibility that it has been a “suckers rally” remains a concern.
- 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 $127.45 versus the 10-Year Treasury yield of 2.41%.
- SPX: 1,960/?
- DJI: 16,802/17,052
- NASDAQ: 4,450/?
- DJT: 8,211/8,457
- MID: 1,409/1,429
- RUT: 1,120/1,169