Large-Cap Indexes Break Support

Data Neutral

Opinion

All of the indexes closed lower Monday with broadly negative breadth on the NYSE and NASDAQ as volumes dropped from the prior session. Some damage was seen on the charts as the large cap indexes broke below their respective near term support levels. The data is largely neutral with some improvement in one of the psychology data points. Yet in spite of yesterday’s declines, we are inclined to keep our near term outlook “neutral” as there is some reason to expect some degree of a counter move from yesterday’s weakness.

• On the charts, all of the indexes dropped yesterday with negative internals on the NYSE and NASDAQ. The SPX (page 2), DJI (page 2), COMPQX (page 3) and NDX (page 3) all closed below their near term support levels while the MID (page 4) and VALUA (page 5) closed below their 50 DMAs. However, we would note that in spite of the weakness, the balance of the indexes held their support levels; something of note given the intensity of yesterday’s overall selling pressure. So we now find the SPX, DJI, COMPQX and NDX in short term downtrends with the rest neutral. And while the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ have turned short term negative, they remain above their 50 DMAs. We would also observe the highest levels of intraday trading volume yesterday came in the last hour of trade as buying lifted the indexes off of their intraday lows.

• The data is mostly neutral including all of the McClellan OB/OS Oscillators (All Exchange:-17.29/+18.89 NYSE:-23.1/+19.71 NASDAQ:-13.36/+21.91). The Equity P/C (0.67) and OpenInsider Buy/Sell Ratio (34.1) are neutral as well with the OEX P/C and Total P/C counterbalancing at 1.59 (bearish) and 1.02 (very bullish) respectively. Also, while remaining neutral, the new AAII Bear/Bull Ratio (contrary indicator) at 29.0/28.0 shows bears outweighing bulls for the first time in several weeks, suggesting the “wall of worry” is being rebuilt. Finally, valuation is less of a concern as the forward p/e for the SPX based on 12 month forward consensus estimates stands at a 17.2 multiple. The “rule of 20” suggests fair market value can be established by subtracting the 10 year treasury yield from 20, in this case yielding a 17.2 multiple as well. By this measure the markets are not overvalued.

• Forward 12-month earnings estimates for the SPX from Bloomberg are $157.57 leaving a 5.8% forward earnings yield on a 17.2 forward multiple.
• SPX: 2,693/2,746
• DJI: 24,304/25,307
• NASDAQ: 7,254/7,474
• NDX: 6,745/7,009
• DJT: 10,475/10,761
• MID: 1,902/1,960
• Russell: 1,561/1,600
• VALUA: 6,105/6,251