Breadth Remains Positive
Opinion: The indexes closed mostly higher yesterday with only the COMPQX closing down on the day. Internals were positive as volumes declined from the prior session. While no formal sell signals have been generated on the charts, the data, especially the McClellan OB/OS Oscillators, is increasing its intensity regarding the potential for some near term weakness and digestion of the recent significant rallies in the indexes over the past three weeks. As such, our near term outlook remains “neutral/negative” while continued improvement in market breadth leaves our intermediate term projection as “neutral/positive”.
- On the charts, only the COMPQX (page 3) closed lower on the day yesterday as some large cap technology stocks weighed on the index. The rest saw modest gains as market breadth continued to improve. Internals were positive. The MID (page 4) closed above resistance but new and substantial resistance is very nearby. Both the SPX (Page 2) and COMPQX tested resistance but failed to violate. As such, all of the short term uptrends remain intact although the stochastic levels remain very overbought.
- The data continues to be our current short term cause for concern as the 1 day McClellan OB/OS Oscillators are at overbought levels not seen in well over a year (VALUA:+144.19 NYSE:+155.98 NASDAQ:+135.61). The 21 day levels are now overbought as well (VALUA:+77.5 NYSE:+95.73 NASDAQ:+60.26). While the OB/OS may stay overbought for extended periods, in our opinion, they imply a shift in near term risk/reward to the negative. Two other data points are in agreement as the ISEE Put/Call Ratio (contrary indicator) is a bearish 13.9 and the OEX Put/Call Ratio (smart money) at 1.41 revealing some nervousness on the part of the pros as they are now slightly weighted to puts.
- In conclusion, although the charts have yet to confirm, the data is suggesting the recent rally is stretched and potentially vulnerable to some profit taking leaving us near term neutral/negative. Our intermediate term outlook remains neutral/positive due largely to better market breadth although valuation issues are starting to arise.
- Forward 12 month earnings estimates for the SPX from IBES of $122.69 leave a 6.13% forward earnings yield on a 16.3 forward multiple.
SPX: 1,934/2,006
DJI: 16,495/17,122
COMPQX; 4,560/4,715
DJT: 7,057/7,662
MID: 1,320/1,415
RUT: 1,035/1,107
VALUA: 4,083/4,457