Internal Deterioration Continues
Opinion
All of the indexes closed lower yesterday with the DJI and SPX fractionally so. Breadth and up/down volumes were notably negative throughout the day as internal action continued to deteriorate, in our opinion. In fact, having watched the market internals throughout the day yesterday, the action suggested that the large cap indexes are being bought with the exclusion of almost everything else as described below. As such, we suspect the large cap ETFs are now crowded trades that may wake up to the reality of the poor action of the rest of the equity markets.
- On the charts, as noted above, all of the indexes closed lower with very negative breadth and up/down volumes (see data). The DJT (page 3) continued its divergent action versus the DJI while the MID (page 4) joined the RUT (page 4) in flashing a bearish stochastic crossover signal.
- What may be of greater import was the fractional weakness in the DJI (page 2) and SPX (page 2) versus the balance of the markets. As we monitored the intraday internals for the markets yesterday, its lopsided action became increasingly apparent. From the SPX intraday lows at 11:00 to its intraday high at 2:00, there was virtually no improvement in the overall advance/decline levels that remained broadly negative. As money poured into the SPY, no lift was seen in the overall A/D.
- This leads us deeper to the supposition that the large cap ETFs have become almost the sole focus for money entering the market. As such, we speculate that funds that are benchmarked to the SPX are seeing such poor action in the broader markets that the SPY has become their primary tool to maintain performance. Such massive amounts of money have been invested in the large cap ETFs over the past few weeks that the risk of their becoming “crowded trades” is quite possible, in our opinion. And as all will know, when crowded trades look for an exit, the movement can prove significant.
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- Sentiment data remains quite cautionary as well as the Rydex Ratio (contrary indicator) has soared to a peak level of 64.0 showing the leveraged ETF traders at their highest level of leveraged long in a very long time.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.24% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.82 versus the U.S. 10-Year yield of 2.35%.
- SPX: 2,015/?
- Dow 30: 17,283/?
- NASDAQ Composite: 4,593/?
- Dow Jones Transportation: 8,772/?
- MID: 1,420/1,439
- Russell 2000: 1,155/1,186