Intermediate Term Remains Cautious
Opinion: All of the indexes closed higher yesterday, although modestly so. Internals were positive as volumes increased on the NYSE but declined on the NASDAQ. While the expected bounce was quite tepid, the data suggests some near term bounce potential remains. However, the chart damage has been significant, suggesting said bounce may be one within a new downtrend for the intermediate term. Valuation, leverage and poor breadth continue to add to our intermediate term concerns as well.
- On the charts, while all of the indexes advanced, the gains were mediocre, at best. The DJI (page 2), DJT (page 3) and MID all closed near their intraday lows while the RUT closed near its intraday high, No downtrends or resistance levels (see below) were tested or violated, leaving the current trend shift fromMonday’s trade negative. The futures suggest a strong open. However, we would not be surprised to see the indexes halt at or near their respective resistance levels.
- The data has shifted a bit to more neutral readings. However, there is enough “weight” to imply some bounce potential remains, in our opinion. While most of the McClellan OB/OS Oscillators have slipped back to neutral, the NYSE 1 day remains oversold at -53.34 while its 21 day is barely into neutral at -49.98. The Total and Equity Put/Call Ratios (contrary indicators) still show the crowd fearful and shaken as they remain heavy in puts at 1.1 and .84 while the OEX Put/Call Ratio (smart money) shows the pros as mildly bullish for the short term at .98. As such, the data scales remain on somewhat of a positive short term tilt.
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- So the short term may still have some gas left in its tank. However, the damage to the charts has been significant, in our view. Multiple high volume support levels were violated by wide margins as were several long term uptrend lines that had been repeatedly tested over the past several months but finally that succumbed on Monday. As such, they could well be signaling the initiation of more difficult times for the indexes over the intermediate term. We would need to see violations of resistance and breaks back above the prior uptrends with notable strength in both volume and breadth to become more sanguine.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.06% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.04 versus the 10 Year Treasury yield of 2.34%.
SPX: 2,053/2,091
DJI: 17,586/17,890
COMPQX: 4,935/5,049
DJT: 7,987/8,306
MID: 1,496/1,527
RUT: 1,242/1,273