Internals Continue To Weaken

McClellan 1 Day OB/OS Oversold

Opinion

Although yesterday’s notable drop in the markets brought the McClellan 1-day OB/OS Oscillators into oversold territory suggestive of some bounce potential, the equity market internals continue to weaken along with the charts while sentiment data has yet to reach fear levels that would imply some bottoming potential. So, although we may see a bounce, we are inclined to view it with some skepticism.

• On the charts, the indexes dropped with broadly negative breadth and higher volumes still suggesting distribution. While the SPX, DJI and DJT closed on their near term uptrend lines, all of the indexes closed at or near their lows of the day. The COMPQX (page 3) closed below its uptrend line going back to July of last year and below support. The RUT (page 4) closed below yet another support level as it continues its downward slide. It is now very oversold on its stochastic at 5.22. The MID (page 4) broke below its 50 DMA and near term support as well. It was a nasty day leaving the NYSE A/D at a lower low and the NASDAQ A/D also at a lower low but below its 50 and 200 DMAs. Breadth continues to erode which we find detrimental to the market’s near term prospects.
• On the data, the 1 day McClellan OB/OS Oscillators are oversold (NYSE:-94.22 NASADAQ:-102.18) suggesting a bounce. Yet the 21 day levels remain only neutral (NYSE:+12.62 NASDAQ:-43.05). And while the Equity Put/Call Ratio (contrary indicator) is a neutral .67, the OEX Put/Call Ratio (smart money) still shows the pros expecting more weakness at 1.57 and 2.26 on its 1 and 15 DMAs. Insiders remain sellers according to the Gambill Insider Buy/Sell Ratio at a low and bearish 6.4 as of 7/17. They have yet to see their stocks as cheap enough to buy. Meanwhile, the leveraged ETF traders (contrary indicator) have increased their leveraged long positions to 1.48 as they have yet to reevaluate their overly bullish outlook.
• In conclusion, although the OB/OS imply a bounce, the rest of the evidence has yet to move us from our more cautious outlook for the intermediate term.
• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.44 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.14 versus the 10 Year Treasury yield of 2.48%.
• SPX: 1,950/?
• DJI: 16,804/?
• NASDAQ Composite: 4,342/4,447
• Dow Jones Transportation: 8,149/?
• MID: 1,391/1420
• RUT: 1,132/1,169