A Little Bounce Left

Published 10/06/2014, 10:44 AM

1-Day McClellan OB/OS Oscillators Neutral

Opinion

The markets continued their oversold bounce on Friday on positive breadth. Yet even with a few positive chart developments, most of the indexes remain below important near term resistance levels that have yet to be cleared. The data suggests some lift potential remains for the near term as well. However, we are of the opinion that the real future success of the indexes will be hinged on whether or not said resistance levels can be violated with rising breadth and volume.

  • On the charts, a few positive signals were given from the large caps as both the DJI (page 2) and DJT (page 3) closed back above their 50 DMAs. The DJT also closed above resistance that has been adjusted below. Yet all of the other indexes remain below resistance and their short term downtrend lines. As well, the lagging action of the small and mid-cap indexes persists.
  • The A/Ds for the All-Exchange, NYSE and NASDAQ remain below their 50 DMAs and in downtrends with the % of SPX stocks above their 50 DMAs at a low 38.8% and the ValueLine Arithmetic index below both its 50 & 200 DMAs. As such, we view Friday’s gains and the near term upside as taking place from extremely oversold conditions within a market suffering from poor breadth and volume. In our opinion, we are not yet out of the woods.
  • On the data, the 1 day McClellan OB/OS Oscillators are neutral for the NYSE (-40.65) and NASDAQ (-20.14). But the 21 day levels remain oversold at -74.46 and -61.34 respectively implying some oversold upside remains. The OEX Put/Call Ratio (smart money) is a mildly bullish 0.9 with the Total Put/Call Ratio (contrary indicator) a bullish .92. The Equity Put/Call Ratio (contrary indicator) is a bearish .54 along with a 46.4 Rydex Ratio (contrary indicator). So although a bit mixed, the data is leaning in the positive direction for the short term, in our opinion.
  • In conclusion, some short term upside may still be available but we are not yet convinced that the major market concerns of distribution evidenced by poor breadth and volume and chart action over the past few weeks is fully behind us.
  • For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.51% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.19 versus the 10 Year Treasury yield of 2.45%.
  • SPX: 1,942/1,984
  • DJI: 16,746/17,016
  • NASDAQ: 4,400,4,546
  • DJT: 8,365/8,507
  • MID: 1,344/1,375
  • RUT: 1,082/1,108

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