Opinion: All of the indexes closed lower yesterday with negative internals. Volumes rose on the NYSE while contracting slightly on the NASDAQ. However, most of the indexes closed well off of their lows of the day suggesting some buying interest remains. With the data unavailable this morning, we will focus on the charts that, for the short term, remain range bound and neutral. However, many of them are taking on the appearance of some topping action while valuation keeps us concerned for the intermediate term.
- The only data point available this morning is the WST Ratio and its Composite, both of which are neutral at 47.5 and 126.0 respectively.
- On the charts, all of the indexes closed lower but, with the exception of the DJT (page 3), closed well off of their intraday lows suggesting buying interest. All remain confined in their trading ranges at this point. The DJT, which continues to act poorly and, in our view, a negative forecaster, closed near its lows and below its 200 DMA. The MID (page 4) closed back below its 50 DMA. The bounce in the DJI has forced its stochastic into overbought territory at 82.0.
- In our opinion, the 6 month charts of the COMPQX (page 3), DJT, MID and RUT (page 4) are taking on the appearance of rolling over. With the SPX and DJI not quite in that position, it suggests to us a continued deterioration of market breadth that could prove problematic.
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- Two charts we continue to monitor cast shadows as well. The yield on the U.S. 10-Year Treasury dipped yesterday to 2.26%. Its notable increase over the past two weeks has set up a technical picture of the potential for higher interest rates. As well, the decline in the US dollar has been notable and has technically reversed the prior uptrend. Further dollar weakness could likely put more upward pressure in commodity prices, which may be a source of the recent weakness in Treasuries. This scenario, should it continue, may mark a turning point for the indexes.
- Finally, with the forward p/e for the SPX near a decade high at 17.1X forward 12 month IBES earnings estimates, we do not believe the markets are in a position to handle any potential shift in “perception”. As such we remain cautious for the intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.83% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $122.80 versus the 10 Year Treasury yield of 2.26%.
SPX: 2,073/2,121
DJI: 17,827/18,205
COMPTQX: 4,919/5,028
DJT: 8,541/8,802
MID: 1,495/1,523
RUT: 1,206/1,252