Charts And Breadth Continue Improvements

McClellan OB/OS Remain Overbought

Opinion

All of the indexes closed higher yesterday with positive breadth as volumes increased from the prior session. All closed at or near their intraday highs. The charts saw further progress as several positive technical events occurred. However, the McClellan OB/OS Oscillators remain overbought with one study now showing highly overbought 21 day levels have been historically bullish. A number of other data points have moderated to neutral causing us to shift our near term outlook from “neutral/negative” to “neutral”. Continued improvement in breadth keeps us “neutral/positive” for the intermediate term.

• All of the indexes closed higher yesterday with positive internals as volumes rose. The SPX (page 2) closed above its intermediate term downtrend line as did the DJI (page 2) while the DJI closed above resistance. The DJT (page 3), MID (page 4) and VALUA (page 5) all closed above resistance as well while also closing above their 200 DMAs. All of the action was bullish as the advance/decline lines for the All Exchange and NYSE made higher highs.

• We would also note the chart of the U.S. Dollar as measured by the UUP ETF (page 9) that was discussed in yesterday’s note saw another day of significant weakness and is now testing new support. Once again, we are of the opinion that the dollar weakness is positive for commodity prices.

• The data has shifted more to neutral in spite of the McClellan OB/OS Oscillator levels that remain cautionary on the 1 day readings (All Exchange:+72.1 NYSE:+92.69 NASDAQ:+50.62). The 21 day levels remain overbought as well (All Exchange:+99.66 NYSE:+132.63 NASDAQ:+65.49). However, a study done by Hays Advisory notes “Readings on the NYSE McClellan Oscillator above 150 , another level reached recently, saw an average market return of 19.1% over the next 12 months , compared to the same 7.8% average return over the period.” The period studied started in 1964 to present.

• The sentiment data is largely neutral with the new AAII Bear/Bull Ratio a neutral 26.86/29.96, a 0.63 Equity Put/Call Ratio and 1.12 OEX Put/Call Ratio. So in spite of the OB/OS levels, the data has taken on a more neutral short term tone. Continued breadth improvement as noted above keeps us “neutral/positive” for the intermediate term outlook.

• Forward 12-month earnings estimates for the SPX from IBES of $123.27 leave a 6.04% forward earnings yield on a 16.6 forward multiple.
• SPX: 2,005/2,061
• DJI: 17,009/17,600
• NASDAQ: 4,612/4,787
• DJT: 7,536/8,006
• MID: 1,389/1,428
• Russell: 1,035/1,107
• VALUA: 4,320/4,586