Decline Has Little Impact On Data
Opinion
Opinion
We continue to be of the opinion the major equity indexes are likely to see tests of their respective near term support levels over the short term as yesterday’s decline had little impact on the data that would imply otherwise. As well, there were a few more technical points on the charts suggesting the probability that further short term downside risk exits for the equity indexes.
- On the data, almost all of the readings remain neutral including the McClellan OB/OS Oscillators for the OTC on its 1 and 21 day levels (-25.83/+32.8). The NYSE remains overbought at +56.91 on the 21 day while the 1 day is a neutral -28.16. As such, no oversold conditions yet exist suggesting a completion of a correction.
- The OEX Put/Call Ratio (smart money) shows the pros remain very concerned at 2.08 and 1.91 on the 1 and 15 DMAs with the “crowd” measured by the Rydex Ratio (contrary indicator) showing the leveraged ETF traders near peak levels of bullishness at 49.0. These data points are not conclusive. However, in our opinion, we would expect opposite conditions to present themselves for a correction to be close to completion. The AAII Bear/Bull Ratio (33/39) and Gambill Insider Buy/Sell Ratio (10%) are neutral.
- On the charts, no new trend breaks were seen yesterday. However, the DJT’s (page 3) continuing deep slide is troublesome as we have viewed it as the leading index over the past several months. Wednesday’s decline in the transports was followed by weakness in technology and financials yesterday.
- As well, volumes increased on the OTC (page 3) on another down day that we interpret as signs of distribution.
- Finally, all five of the indexes saw their bearish stochastic crossovers drop below the 80 signal line. Stochastics should only be used for confirmation purposes, in our opinion. However, it is not uncommon for them to drop to the 20s once the 80 signal line is violated. Again we would stress the stochastics to be a secondary consideration. Yet their current condition does add to our short term concerns.
- In conclusion, given the state of the charts and data, we suspect more short term downside is the higher probability before the equity indexes can resume their upward track.
- For the longer term, we remain bullish on equities as they remain undervalued with a 7.4% forward earnings yield versus the 10-Year Treasury yield of 1.93%.
- SPX: 1,515/?
- DJI: 13,955/?
- OTC: 3,160/?
- DJT: 5,878/?
- RUT: 905/?