McClellan OB/OS Imply Bounce

Trends Remain Largely Negative

Opinion

The indexes closed higher Friday after Thursday’s drubbing. Internals were mixed on the NYSE while NASDAQ internals were positive. Volumes were below prior levels on both the NYSE and NASDAQ. The bulk of the charts remain negative while some of the data is suggestive of a near term bounce. However, our opinion is said bounce is occurring within a market that continues to deteriorate while risk remains high versus potential reward as valuations remain high (even with the recent downdraft), margin exposure is excessive and advisors remain complacent.

• On the charts, all of the indexes closed higher Friday after Thursday’s notable declines. However, Friday’s action did little to alter the worsening technical picture for the indexes. The only index trading above its 50 DMA is the DJI (page 2). It is also the only index still in a short term uptrend. Thursday’s action left the rest of the indexes below their 50 DMAs as multiple support levels were violated. The SPX (page 2), COMPQX (page 3), MID (page 4), RTY (page 4) and VALUA (page 5) are all in short term downtrends and have deteriorated to the point of also trading below their longer term uptrend lines. Several 150 DMAs have been violated as well. One outlier is the DJT (page 3), that preceded the other index declines, closed above its short term downtrend line Friday, turning its near term trend to neutral from negative. All in all, the charts have darkened notably.

• The data is as of the close of Thursday. As such, it may be less instructive. However, it finds all of the 1 day McClellan OB/OS Oscillators deeply oversold and suggesting a bounce (All Exchange;-87.81/-9.48 NYSE:-123.24/-8.26 NASDA:-101.73/-45.83). Friday’s gains may have relieved some of that potential but, in our opinion, bounce potential remains. We speculate the bounce has potential to test resistance with a probability of failure and resumption of further weakness.

• In conclusion, recent market weakness has brought the charts more in line with the cautionary signals noted in prior reports. Even with the recent decline, valuation remains high as does margin exposure and advisor complacency, given their current readings. We continue to view market risk as high versus potential reward.

• Forward 12-month earnings estimates for the SPX from Bloomberg of $134.01 leave a 5.5 forward earnings yield on a 18.2 forward multiple, over a decade high.
• SPX: 2,434/2,467
• DJI: 21,640/21,992
• Nasdaq; 6,192/6,306
• DJT: 9,072/9,294
• MID: 1,701/1,731
• Russell: 1,368/1,403
• VALUA: 5,425/5,519