Data Mostly Neutral
Most of the indexes closed lower yesterday with negative internals on the NYSE while the NASDAQ’s were mixed. Both occurred on higher volume than the previous trading session. Two of the index charts did see breaks below support. However, the DJI rallying 600 points above its intraday low, as did the rest of the indexes, offers some encouragement as it implies a possible washout of near term selling pressure. The majority of the data is neutral. Yet we would also note the markets appear to be well undervalued via the “rule of 20” theory. Nonetheless, we are maintaining our near term “neutral” outlook awaiting violations of resistance required to turn more positive.
- On the charts, the COMPQX (page 3) and NDX (page 3) managed to close higher yesterday as the rest posted losses. We would note however that all closed significantly above their intraday lows due to a surge of buying in the last hour of trade. We view this action as encouraging for two reasons. In our opinion, the first hour of trade is largely based on emotional reactions to the pertinent news of the morning while the last hour of trade is more disciplined in its activity. Thus a notable lower open and intraday weakness followed by a late day surge in buying is viewed as a positive. As well, given that the DJI had dropped over 1,400 points from the prior session high, it implies there may have been a washout of near term selling pressure. Yet negative chart action was seen on the MID (page 4) and VALUA (page 5) as both closed below support, turning their near term trends to negative. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain neutral.
- The majority of the data remains neutral including all of the McClellan OB/OS Oscillators (All Exchange:-1.87/-28.42 NYSE:-1.39/-21.06 NASDAQ:-3.1/-34.06). Valuation, however, seems to be quite appealing as it is well below fair value, assuming current estimates hold, with the forward 12-month earnings estimates for the SPX via Bloomberg of $170.94, leaving the forward 12 month p/e for the SPX at 15.8 versus the “rule of 20” implied fair value of a 17.1 multiple. The “earnings yield” stands at 6.3%. Seasonality remains encouraging has the November to April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative.
- In conclusion, yesterday’s late action combined with the charts and data keep us of the opinion that we should maintain our near term outlook at “neutral”. However, we are inclined to suspect the eventual resolution will be to the upside.
- SPX: 2,691/2,272
- DJI: 24,894/25,507
- Nasdaq: 7,133/7,335
- NDX: 6,715/6,953
- DJT: 10,300/10,655
- MID: 1,789/1,838
- Russell: 1,469/1,531
- VALUA: 5,831/5,964