Two Bearish Stochastic Crossovers Triggered
Opinion: All of the indexes closed higher yesterday with positive internals as volumes declined once again from the prior session. No support or resistance levels were violated. However, we remain near term “neutral/negative” in spite of the indications for a positive open this morning as the markets remain extremely overbought while some bearish stochastic crossovers have appeared suggesting some caution should be exercised. Some other data noted below is implying caution as well. For the intermediate term, we remain “neutral/positive” as breadth has improved notably from just a few months ago.
- On the charts, all of the indexes closed higher yesterday with positive internals. However, volumes did decline again suggesting a slowing of demand while progress was modest in most cases. No resistance levels were violated. We would note that the COMPQX (page 3) and DJT (page 3) both registered bearish stochastic crossovers suggesting caution. As we have noted several times in the past, we regard the DJT as the leading index. Should this dynamic continue, we would expect the rest of the indexes to follow suit over the relatively near term.
- Several data points suggest caution as well. All of the McClellan OB/OS Oscillators remain overbought with the All exchange 21 day (+102.58), and the NYSE 1 & 21 day (+105.25/+126.06) extremely so. Yes, they can stay overbought. However, ignoring such levels has proven painful in the large majority of cases.
- Another cautionary point is coming from the % of SPX stocks trading above their 50 DMAs (page 9) that now stands at 75.8. It is counter intuitive as so many stocks above their 50 DMAs would sound bullish. In fact, such levels have been associated with short term market tops over the past two years. They actually imply a market that has become overextended. The OEX Put/Call Ratio (smart money) has moderated but remains mildly bearish at 1.14 with the pros still expecting some near term weakness.
- In conclusion, we believe the strong futures this morning have a reasonable probability of being a short term peak for the markets as risk, in our opinion, now well outweighs potential reward for the near term. The intermediate term outlook remains neutral/positive as breadth of individual stocks as well as sectors has improved significantly over the past several weeks.
- Forward 12 month earnings estimates for the SPX from IBES of $123.57 leave a 6.21% forward earnings yield on a 16.1 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