Breadth Continues To Narrow

Valuation Remains Near Prior Peak

Opinion

The indexes closed mostly lower yesterday although two of the high profile indexes made new closing highs. However, breadth was negative as both the NYSE and NASDAQ traded heavier volume than the prior session. None of the short term trends were altered, leaving them a mix of positive and neutral. Market breadth weakened a bit further while valuation remains at its prior peak that stalled the last rally. The message from the data dashboard is neutral. As such and in spite of breadth and valuation concerns, we suggest the current trends of the indexes should continue to be respected on their individual merit until proven otherwise.

• On the charts, most of the indexes closed lower yesterday with negative breadth on the NYSE and NASDAQ as volumes rose from the prior session. Yet in spite of poor internals, the SPX (page 2) and DJI (page 2) made new closing highs as the rest declined. Their advance on negative breadth with the rest of the indexes declining implies an increase in selectivity of bullish participants. Overall market breadth remains mixed with the All Exchange cumulative advance/ decline neutral and above its 50 DMA, the NYSE positive and above its 50 DMA and the NASDAQ negative and below its 50 DMA. The short term trends remain positive for all of the indexes with the one exception of the RTY (page 5) in a neutral, sideways pattern.

• The data is sending a neutral message. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-12.18/+27.07 NYSE:-1.11/+43.47 NASDAQ:-23.26/+15.68). The OpenInsider Buy/Sell Ratio is also neutral at 40.8. Conflicting signals are coming from the put/call ratios. The Equity P/C (contrary indicator) is a bearish 0.51 while the Total P/C (0.85) and OEC P/C (0.58) are bullish.

• In conclusion, weakening market breadth and valuation that is back to its prior recent peak are worthy of some concern, in our opinion. However, unless or until the current short term trends of the various indexes are violated, we remain of the opinion that they should continue to be respected.

• Forward 12-month earnings estimates for the SPX from Bloomberg of $140.60 leave a 5.46 forward earnings yield on an 18.9 forward multiple.
• SPX: 2,589/NA
• DJI: 23,427/NA
• NASDAQ: 6,759/6,910
• NDX: 6,224/6,409
• DJT: 9,978/NA
• MID: 1,825/NA
• Russell: 1,500/1,547
• VALUA: 5,837/NA