Some Data Turning Cautionary
Opinion:
Our near term outlook for the major equity indexes remains neutral although a few clouds are starting to gather on the horizon suggesting the recent short term rally may be approaching its zenith. As such, although we are not outright negative, we are of the opinion that short term risk is beginning to emerge and some degree of caution is appropriate.
- Yesterday’s advances for the equity indexes came on positive breadth but volumes slipped. The SPX (page 2) and DJT (page 3) both made new closing highs. The RUT regained its place back above its 50 DMA as well.
- However, when we view the DJT chart, which we continue to believe has been the best forecaster the markets over the past several months, it has seen a six day rally that now has it quite extended above support and its 50 DMA. With an overbought stochastic of 95.48, we would not be shocked to see the DJT retrace some gains that would suggest the same for the rest of the indexes. In fact, all of the stochastic levels are overbought with only the DJI below 90 at 83. There are no “sell signals” on the price charts but the issues discussed above lead us to believe some risk has begun to present itself.
- On the data, both the WST Ratio and its composite are bearish at 71.8 and 155.8 with the Equity Put/Call Ratio (contrary indicator) at .52 showing the crowd as being active call buyers. The NASDAQ 1 day McClellan OB/OS Oscillator remains overbought at +74.66 along with the NYSE 21 day at +69.02. The others are neutral. The balance of the data is largely neutral. So although there is not a tremendous amount of weight on the negative side of the data scales, there is enough, in our opinion, to warrant some degree of caution.
- In conclusion, while the charts remain intact, there is some evidence building to suggest our near term neutral expectations for the major equity indexes should become a bit more tempered with some degree of caution.
- For the longer term, we remain bullish on equities as they remain undervalued with a 6.46% forward earnings yield for the SPX based on 12-month IBES forward earnings estimates of $123.94 versus the 10-Year Treasury yield of 2.45%.
- SPX: 1,883/?
- DJI: 16,331/?
- NASDAQ: 4,175/4,274
- Dow Jones Transportation: 7,750/???
- S&P Midcap 400: 1,351/1,385
- Russell: 1,116/1,147