Some Concerns RemainOpinion
The indexes closed mostly higher yesterday with the one outlier of the NDX declining. Internals were mixed on the NYSE while NASDAQ internals were positive as volumes rose on both exchanges from the prior session. Several more new closing highs were achieved. The data remains mixed. Yet with the short term trends generally positive, extended valuation combined with what we believe to be signs of weakening internal breadth suggest to us that some caution may be warranted as we enter earnings season.
- On the charts, only the NDX (page 3) closed lower yesterday. The SPX (page 2), DJI (page 2), COMPQX (page 3) and MID (page 4) made new closing highs. The near term trends for the DJT (page 4), MID (page 4) and RTY (page 5) are neutral with the rest still in their uptrends. Market breadth has come into question as the NYSE cumulative advance/decline remains positive but the All Exchange is now neutral with the NASDAQ actually negative. Advancing indexes on negative breadth are typically considered to be less than healthy moves that can eventually lead to more negative action. Although we have yet to see this come to fruition, it is, in our opinion, something to watch closely should breadth continue to deteriorate.
- The data is mixed. The bulk of the McClellan OB/OS Oscillators remain neutral (All Exchange:-23.71/+46.71 NYSE:-16.21/+55.94 NASDAQ:-29.91/+43.93) with only the NYSE 21 day mildly overbought. The Total (0.95), Equity (0.72) and OEX (0.94) Put/Call Ratios are on bullish signals but, as stated recently, we find the % of SPX components trading above their 50 DMAs at 75.2%, a level usually seen at peaks of market advances. When combined with the Investors Intelligence Bear/Bull Ratio (contrary indicator) showing excessive bullish sentiment at 15.1/60.4 and the forward p/e for the SPX based on forward 12-month earnings estimates at a 15-year high of an 18.7 multiple, by that measure, stocks are not cheap and may have already figured in a strong earnings season. Should earnings disappoint, there may be some pain involved. It, along with some breadth deterioration, suggests some caution may now be appropriate.