Sentiment Remains A Concern
Opinion: Yesterday’s drop in the equity markets had greater impact on some index charts than others. The MID and RUT suffered the greater damage as both broke near term support as well as their short term uptrends. While the data remains mixed, sentiment continues to be a concern leaving us with the expectation of some near term sideways action that could lead to some further weakness.
- On the charts, the SPX (page 2) closed below its short term uptrend line but managed to stay above support that may be the more important issue. The DJI (page 2) also closed above support and bounced off of its 5 month uptrend line from the February lows. The duration of the uptrend of the DJI makes its health an important indicator to monitor. The COMPQX (page 3), in spite of its sizable drop, bounced off of support and its long term uptrend line thus suffering no real technical damage. The DJT (page 3) fared the best as it saw only modest losses closing near the highs of the day.
- The RUT and MID took on the most water. The RUT (page 4) broke notably below its near term support and short term uptrend line suggesting a possible trend change to neutral/negative. The MID saw similar cracks closing below its short term uptrend and support but not quite to the same magnitude as the RUT. In short, the larger cap indexes fared better than the mid to small caps that is also suggested by the much more negative internals on the NASDAQ.
- The data remains mixed. All of the McClellan OB/OS Oscillators are now neutral (NYSE:-48.46/+34.38 NASDAQ:-45.06/+3.31). However, they are not oversold.
- What continues to nag us is the split in sentiment. The OEX Put/Call Ratio (smart money) still shows the pros as quite bearish at 2.6. Although this indicator has lost some of its predictive value over the past several months, we believe its cautionary signal should still be a consideration. The Gambill Insider Buy/Sell Ratio has turned bearish once again at a low 7% as of 7/7. So we find the pros and insiders to be quite nervous. In contrast, the “crowd” measured by the detrended Rydex Ratio (contrary indicator) finds the leveraged ETF traders still extremely optimistic at 1.53. As such, the sentiment data still suggests caution should be applied.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.42 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.12 versus the 10 Year Treasury yield of 2.57%.
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