Indexes Stall On Negative Internals
Opinion
All of the indexes closed modestly lower yesterday post their gyrations on the Fed’s commentary. As such, there was little impact on the charts but internals deteriorated on higher volumes. There are still some cautionary signals coming from the data that, in combination with the vertical nature of the rally, suggest risk outweighs reward over the near term, in our opinion.
- On the charts, there was little change as the SPX and DJI both attempted to break above resistance on an intraday basis but both failed by the close. Internals turned negative as volumes swelled on the decline with negative breadth and Up/Down Volume for both exchanges suggesting institutional distribution. The only other points worthy of note at this time are the stochastic levels remain very overbought in the high 90s on each index while the recovery in the SPX still sees over 40% of its components trading below their 50 DMAs. In short, the rally has been very selective via that metric.
- On the data, the McClellan 1 day OB/OS Oscillators remain overbought on the NYSE (+94.0) and NASDAQ (+87.06) implying near term vulnerability. The 21 day levels are neutral at +31.26 and +9.75 respectively. Sentiment remains a concern as the “crowd” has quickly forgotten the pain of the correction by turning heavily bullish as noted by the Rydex Ratio (contrary indicator) as the leveraged ETF traders are heavily long at 56.2, near pre-correction levels. As well, the new Investors Intelligence Bear/Bull Ratio (contrary indicator) saw bearish concerns evaporate quickly back to 16.3/47.0.
- The various Put/Call Ratios are on bullish signals but the WST Composite remains extremely cautionary at 274.8. As such, the overall data landscape has a somewhat negative tone at present.
- In conclusion, we continue to have near term concerns for the equity markets based on the data, charts and forward SPX P/E 15.5X valuation which, in our opinion, imply investors have become dangerously confident that every market dip is a buying opportunity.
- 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 $127.58 versus the U.S. 10-Year yield of 2.32%.
- S&P 500: 1,950//1,985
- Dow 30: 16,700/17,015
- NASDAQ Composite: 4,426/4,565
- Dow Jones Transportation: 8,484/?
- S&P Midcap 400: 1,367/1,412
- Russell 2000 : 1,119/1,157