Multiple Resistance Levels Violated

Data Mostly Neutral

All of the indexes closed notably higher yesterday with positive internals on the NYSE and NASDAQ as trading volumes rose from the prior session. The charts continued to improve, including several violations above short term resistance levels as well as improvement in cumulative breadth. The data has turned more neutral as a result of the sizable rally. As such, we are maintaining our near term “neutral/positive” outlook for the major equity indexes.

• On the charts, all of the indexes closed higher yesterday with positive internals on higher trading volume. Most importantly, all of the indexes, with the one exception of the RTY (page 5), closed above their near term resistance levels, thus turning their short term trends from neutral to positive. As well, the SPX (page 2) and DJI (page 2) followed the other indexes that had previously yielded “bullish stochastic crossover” signals. The DJI managed to close above its 200 DMA while the DJT is the first to regain pricing above its 50 DMA. We would also note the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ have turned positive. All of these issues are a significant technical improvement from what was seen only one week ago.

• The data has turned more neutral as might be expected as a result of yesterday’s sizable gains. All of the McClellan OB/OS Oscillators are neutral with the one exception of the NASDAQ’s 1 day turning mildly overbought (All Exchange:+49.21/+21.44 NYSE:+44.98/+28.58 NAASDAQ:+55.59/+18.27). The Total (0.840, Equity (0.62) and OEX (1.25) are neutral as well. However, the detrended Rydex Ratio (contrary indicator) still finds the leveraged ETF traders leveraged short at -1.06 while the Open Insider Buy/Sell Ratio, while remaining neutral, still finds insiders as buyers at 105.3 Seasonality remains encouraging has the November to April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative. Valuation, assuming current estimates hold, is below fair value with the forward 12-month earnings estimates for the SPX via Bloomberg of $170.8, leaving the forward 12-month p/e for the SPX at 16.1 versus the “rule of 20” implied fair value of a 17.0 multiple. The “earnings yield” stands at 6.23%.

• In conclusion, while it would be normal to expect some profit taking over the near term given the size of yesterday’s move, we remain “neutral/positive” in our outlook given the improvement in the charts, market breadth, seasonality and current valuation.
• SPX: 2,682/2,775
• DJI: 24,673/25,396
• Nasdaq: 7,033/7,324
• NDX: 6,705/6,931/
• DJT: 10,365/10,985
• MID: 1,831/1,878
• Russell: 1,500/1,532
• VALUA: 5,915/6,072