Breadth Remains Negative
Opinion: The indexes closed lower yesterday with negative internals on both the NYSE and NASDAQ. Volumes rose on the NYSE and declined on the NASDAQ versus the prior session. The charts saw a couple of negative technical events but support levels held for the most part. The data is implying some potential for some near term relief. However, we are keeping our near term outlook for the major equity indexes at “neutral/negative” due to continuing deterioration of market breadth and historically high forward valuation of the SPX.
On the charts, all of the indexes closed lower yesterday with negative internals. The SPX (page 2), DJI (page 2) and MID (page 4) tested support successfully but the DJT (page 3) closed below another support level while the VALUA (page 5) closed below its 50 DMA. The short term trends are neutral for most of the indexes with the exception of the DJT that is in a downtrend. What remains a concern for us is the advance/decline lines for the All Exchange, NYSE and NASDAQ are all negative and below their 50 DMAs. The implication is that the large cap indexes are masking the weakening of the underlying breadth foundation for the markets.
The data, in our opinion, is suggesting some potential for near term relief as all of the 1 day McClellan OB/OS Oscillators are oversold (All Exchange:-61.19 NYSE:-84.68 NASDAQ:-53.14). The 21 day levels are neutral. The put/call ratios are also positive as the Total and Equity Put/Call Ratios (contrary indicators) show the crowd nervous and long puts at 0.93 and 0.73 respectively while the OEX Put/Call Ratio finds the pros having flipped from being very long puts yesterday to being very long calls this morning at 0.42 as they now expect some strength on the horizon.
In conclusion, while the data is implying some near term relief for the markets, the fact that internal breadth has continued to deteriorate under the camouflage of the large cap indexes while forward valuation of the SPX based on forward 12 month IBES earnings estimates remains near its decade high at a 17.8 multiple suggests to us that there is a reasonably high level of risk versus potential reward at present. Thus we maintain our near term “neutral/negative” opinion intact.
Forward 12 month earnings estimates for the SPX from IBES of $133.18 leave a 5.63 forward earnings yield on a 17.8 forward multiple, over a decade high.
SPX: 2,360/2,384
DJI: 20,761/20,957
COMPQX; 5,804/5,875
DJT: 9,045/9,416
MID: 1,697/1,744
RTY: 1,358/1,383
VALUA: 5,354/5,452