Some Pause/Retracement Potential Still Exists
Opinion
Or near term opinion expecting some pause or give back in response to the prior rally remains unchanged. Although the data is almost entirely in neutral territory, the extended levels on some of the index charts combined with high stochastic levels and questionable market internals continue to imply to us that short term risk has become a bit more elevated to the point of warranting some near term caution.
- On the charts, there are no blatant sell signals at this point. However, our concerns regarding the extended chart for the DJT (page 3) remain. With high volume price support at 7,750 versus its new high close of 8,148, there is plenty of “space” for some corrective action. Its extension above its near term uptrend line is of equal concern as is its overbought stochastic at +99. As stated yesterday, our belief that the DJT has been the leading index for some time adds concern for the near term prospects of the markets in general. The DJI and SPX (Page 2) are a bit extended as well but not to the degree of the DJT.
- The stochastic levels for all of the indexes remain very overbought as well. Also, yesterday’s action was of no comfort as the SPX and DJI rose on light volume and negative breadth while the COMPQX (page 3) and RUT (page 4) declined on heavier volume and negative breadth. So although there are no obvious cracks at this point, we believe there is some reason for near term concern.
- The data is almost completely neutral with the exception of the NYSE 21 day McClellan OB/OS Oscillator that remains overbought at +54.14.
- In conclusion, nothing goes up in a straight line and given the current “stretch” in the DJT, we believe some near term caution is appropriate.
- For the longer term, we remain bullish on equities as they remain undervalued with a 6.44% forward earnings yield for the SPX based on 12-month IBES forward earnings estimates of $123.94 versus the 10-Year Treasury yield of 2.53%.
- S&P 500: 1,883/?
- DJI: 16,400/?
- NASDAQ Composite: 4,175/4,274
- Dow Jones Transportation: 7,750/?
- MID: 1,351/1,385
- RUT: 1,116/1,147