SPX Flashes “Bearish Stochastic Crossover” Signal
Opinion: All of the indexes closed lower yesterday with negative internals as volumes rose from the prior session on both the NYSE and NASDAQ. Several closed near their intraday lows, but the final result was that no support levels were violated, leaving all of the near term sideways trading patterns intact. The data remains mostly neutral. However, current market psychology indicators remain a concern. As such, the lack of any violations on the charts combined with current data continues to suggest our near term “neutral” outlook for the major indexes remains appropriate until evidence suggests otherwise. Extended forward valuation of the SPX keeps our intermediate term view also “neutral”.
On the charts, all of the indexes closed lower yesterday with negative internals as volumes rose from the prior session. No critical events occurred on the charts, leaving the “rectangle” patterns intact. However, we would note the SPX (page 2) did flash a “bearish stochastic crossover” signal but has yet to become actionable unless support is violated. We would also note the RTY (page 4) closed on support. Any further weakness in that index has the potential to yield a sell signal. However, it has yet to occur. The VIX (page 9) did see an intraday spike but closed back near its 12 month lows. We continue to be of the opinion that the VIX is suggesting some eventual return of volatility into the markets. As a side note, a number of the financial services stocks appeared to be rolling over.
The data remains mostly neutral. Only the 21 day NSE McClellan OB/OS Oscillator is overbought (All Exchange:+2.13/+28.66 NYSE:+10.1/+59.73 NASDAQ:-25.39/+11.29). The rest are neutral as is the Equity Put/Call Ratio at 0.65. The OEX Put/Call Ratio is mildly bullish at 0.82 as the pros continue to expect some degree of near term strength.
At the risk of sounding like a broken record, the psychology data remains troubling, in our view. The crowd is overly bullish as expressed by the Investors Intelligence Bear/Bull Ratio (contrary indicator) of 18.3/58.6 as advisors are devoid of concern while insiders measured by the Gambill Insider Buy/Sell Ratio at 6.3 very actively selling their own stock at current levels. Historically, this has typically been a relevant warning signal for the markets.
In conclusion, we have yet to see a sufficient shift in the weight of the evidence to alter our near term “neutral” view for the major equity indexes, in spite of our psychology concerns.
Forward 12 month earnings estimates for the SPX from IBES of $132.12 leave a 5.81 forward earnings yield on a 17.2 forward multiple, a 12 year high.
SPX: 2,237/2.277
DJI: 19,735/19,975
COMPQX; 5,432/NA
DJT: 9,000/9,317
MID: 1,659/1,690
RTY: 1,352/1,388
VALUA: 5,262/5,388