Internals Continue To Deteriorate
Opinion: The McClellan 1 day OB/OS Oscillators are slightly oversold suggesting some bounce potential. However, we are of the opinion that the skies above the major indexes are darkening as internals continue to deteriorate, volumes are suggestive of distribution and sentiment remains a concern with valuations getting a bit stretched.
- On the charts, the indexes closed mixed yesterday as the DJI and DJT closed higher while the rest of the indexes dropped. The DJT (page 3) actually made another new closing high. However, we believe the greater import is coming from the internals as decliners broadly outnumbered advances on both exchanges while overall volumes rose. The combination of those factors suggests to us further deterioration of breadth with implications of distribution.
- What is of equal concern is the NASDAQ Advance/Decline broke below both its 50 and 200 DMAs while making yet another lower low. This deterioration has not yet made itself evident to the large cap indexes. However, the NYSE A/D appears to be making a lower high suggesting the deterioration may be starting to show up there as well. In short, we suspect the large cap indexes are masking a broader weakening of the markets. The COMPQX (page 2) bounced off of its uptrend line while the RUT (page 4) bounced from its 50 DMA.
- On the data, the McClellan 1 day OB/OS Oscillators are slightly oversold (NYSE:-58.88 NASDAQ:-62.05) suggesting some bounce potential. However, the Gambill Insider Buy/Sell Ratio slid to a bearish 6.1% while the detrended Rydex Ratio (contrary indicator) shows the leveraged ETF traders still overly bullish at 1.4. The OEX Put/Call Ratio (smart money) dropped to a mildly bullish .82 but its 15 DMA shows the pros still very nervous at 2.4. The WST Ratio and its Composite are bearish at 62.0 and 152.1. Finally, valuations, in our opinion, are getting a bit stretched with the SPX forward 12 month P/E at 15.6X, its highest level since 2007.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.39 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.14 versus the 10 Year Treasury yield of 2.55%.
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