Bounce Likely Within Negative Trends

Published 03/10/2017, 10:27 AM
Updated 07/09/2023, 06:31 AM
US500
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DJI
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RTYH25
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IXIC
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DJT
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MID
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Near-Term Outlook Remains “Neutral/Negative

Opinion

Most of the indexes closed lower yesterday with negative internals on the NYSE while the NASDAQ saw negative breadth but positive up/down volumes. The DJT broke another support level while the current short term trends remain a mix of neutral and negative. The data is mixed but is suggestive of a short term bounce. However, we are of the opinion that said bounce is likely occurring within a weakening market structure. As such, we are maintaining our near term “neutral/negative” outlook for the major equity indexes.

  • On the charts, the only indexes closing higher yesterday were the SPX (page 2) and DJI (page 2). And those gains were seen within a day of negative breadth and up/down volumes on the NYSE. It is suggestive, in our opinion, of a continuation of deteriorating of market breadth. The DJT (page 3) closed below another support level while the MID (page 4) and VALUA (page 5) tested support. The short term trends for the various indexes find the DJT and RTY to be negative while the rest are neutral. We would also note the advance/decline line for the VALUA (page 9) joined the NASDAQ A/D in closing below its 50 DMA, also a signal of deterioration of market breadth.
  • The data, on the other hand, is suggesting the potential for a bounce. All of the 1 day McClellan OB/OS Oscillators are oversold with the NYSE extremely so (All Exchange:-98.69/-6.08 NYSE:-133.02/-8.48 NASDAQ:-80.26/-8.3). The Total and Equity Put/Call Ratios (contrary indicators) find the crowd nervous and heavy in puts at 1.12 and 0.72 respectively. This is being somewhat counterbalanced by the OEX Put/Call Ratio revealing the pros remain very heavily weighted in puts at 2.07 as they expect further weakness. The Gambill Insider Buy/Sell Ratio remains a neutral 10.8.
  • In conclusion, the 1-day McClellan numbers are at levels usually found just prior to a bounce from a period of prior weakness. The futures this morning seem to confirm. However, we are of the opinion that said bounce may well be occurring within an increasingly weaker equity market structure. Breadth has deteriorated notably leaving only the large cap indexes that have broad ETF ownership in deceivingly decent shape. Said narrowing of breadth implies a top heavy market. Forward valuation of the SPX based on forward 12 month IBES earnings estimates remains near a decade high at a 17.8 multiple while investment advisors are highly complacent with a 17.3/57.7 Investors Intelligence Bear/Bull Ratio (contrary indicator). As such, we still see current risk/reward as poor.
  • Forward 12-month earnings estimates for the SPX from IBES of $133.18 leave a 5.6 forward earnings yield on a 17.8 forward multiple, over a decade high.
  • SPX: 2,360/2,384
  • DJI: 20,761/20,957
  • Nasdaq: 5,804/5,871
  • DJT: 9,152/9,416
  • MID: 1,697/1,744
  • Russell: 1,358/1,383
  • VALUA: 5,354/5,452

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