McClellan 1-Day OB/OS Oscillators Remain Neutral
The major equity indexes closed mixed Tuesday with mixed internals on the NYSE, while the NASDAQ’s came in negative. Overall, trading volumes declined on the NYSE and rose on the NASDAQ from the prior session. Three of the index charts made new closing highs, while no shifts in the largely positive near-term index trends occurred. Cumulative market breadth remains positive as well. On the data side, the 1-day McClellan OB/OS oscillators remain neutral, while the psychology levels continue to suggest an excess of bullish market expectations on the part of investors, both individual and investment advisors, as well as leveraged ETF traders. Forward 12-month consensus earnings estimates for the S&P 500 continue to rise, while the “rule of 20” suggests overvaluation persists. Nonetheless, with the chart trends and breadth positive and a lack of warning from the OB/OS, we are maintaining our near-term “neutral/positive” macro-outlook for equities.
On the charts, the DJT, MID, RTY and VALUA closed higher yesterday as the rest posted minor losses with mixed NYSE and negative NASDAQ internals.
- The DJT, MID and VALUA managed to register new closing highs, leaving all but the DJI (page 2), which is neutral, in near-term uptrends.
- Market breadth remains positive on the All Exchange and NASDAQ while some overbought stochastic readings appeared but have yet to generate bearish crossover signals.
On the data, the McClellan 1-Day OB/OS oscillators remain neutral (All Exchange: +25.97 NYSE: +19.77 NASDAQ: +31.54).
- Sentiment indicators, however, remain cautionary. The Rydex Ratio measuring the action of the leveraged ETF traders is still in very bearish territory at 1.58 as of our last reading.
- This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) stayed bearish and unchanged at 16.8/63.4. The AAII, however, turned more bearish at 21.83/55.47. History suggests bullish expectations have become excessive that may cause an issue for the markets going forward.
- The Open Insider Buy/Sell Ratio, however, lifted back into neutral territory at 26.4 as insiders slightly increased their buying activity.
- Valuation still appears extended with the forward 12-month consensus earnings estimate from Bloomberg rising to $184.20. This leaves the SPX forward multiple at 22.7 while the “rule of 20” finds fair value at 18.4. The valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.
- The SPX forward earnings yield stands at 4.4%.
- The 10-year Treasury yield closed at 1.62% and near what we see as resistance at 1.63%. We view 1.55% as support.
In conclusion, the chart trends with the OB/OS levels and improving market breadth suggest we maintain our near-term “neutral/positive” macro-outlook for equities intact, despite sentiment and valuation concerns.
DJI: 33,545/34,133
COMPQX: 13,790/NA
NDX: 13,755/13,953
DJT: 14,920/NA
RTY: 2,250/2,300
VALUA: 9,293/NA