Charts And Breadth Improve

Data Turns More Cautionary

Opinion

All of the indexes closed higher yesterday with positive breadth as volumes declined on the NYSE but rose on the NASDAQ. All closed at or near their intraday highs as some further progress was seen on the charts. However the cautionary tone of the data has intensified causing us to stay neutral in spite of the technical improvements. No technical sell signals have been generated, yet the data is stretched to the point of suggesting some degree of risk entering the markets. Breadth has improved to the point of turning our intermediate term outlook to “neutral/positive” from “neutral”.

• On the charts, the indexes had a particularly strong day yesterday, something we were not expecting. Breadth was positive while all closed near their highs of the day. Chart improvements came in the form of the SPX (page 2), DJI (page 2), COMPQX (page 3) and RUT (page 4) all closing above their 50 DMAs. They confirmed the leading signal from the DJT achieved on 2/17.

• As well, the COMPQX, MID (page 4) and VALUA (page 5) closed above their respective resistance levels that are adjusted below. Equally important, for the more intermediate view, breadth continued to improve as the NYSE A/D closed above its 200 DMA and the NASDAQ A/D turned positive while closing above its 50 DMA. All of the stochastic readings remain overbought but have yet to generate bearish crossover signals. Thus the charts remain positive at this point.

• The data, however, is raising more yellow flags causing us to remain neutral for the short term. All of the McClellan OB/OS Oscillators are very overbought (All Exchange:+121.8 NYSE:+136.23 NASDAQ:+112.62). The WST Ratio and its Composite are bearish as well at 73.2 and 157.9 while the OEX Put/Call Ratio (smart money) at 1.73 now finds the pros weighted in puts and expecting some weakness. Yet we still find insiders leaning to the buy side with a mildly bullish 26.0 Gambill Insider Buy/Sell Ratio. We would note that the OB/OS levels, extended as they are, can sometimes actually be confirmations of an up move post a particularly intense correction as was seen at the beginning of the year. Nonetheless, we find them a bit disturbing when combined with the other data for the short term.

• Forward 12-month earnings estimates for the SPX from IBES have been reduced from $123.12 to $122.69 leaving a 6.2% forward earnings yield with a 16.1 forward multiple.
• SPX: 1,903/1,990
• DJI: 16,204/17,122
• NASDAQ; 4,504/4,715
• DJT: 7,057/7,513
• MID: 1,308/1,374
• Russell: 995/1,052
• VALUA: 4,062/4,270