“Neutral/Positive”Some Issues To Keep In Mind
The bulk of the indexes closed lower Tuesday with negative internals on the NYSE and NASDAQ as volumes declined from the prior session. No major technical events of import were generated on the charts, leaving them in a mix of neutral and positive short term trends. The data remains largely neutral as well. Nonetheless, for the reasons discussed below, we are maintaining our near term “neutral/positive” outlook for the major equity indexes.
On the charts, the bulk of the indexes closed lower yesterday with the one exception of the NDX (page 3) posting a minor gain. Internals were negative on the NYSE and NASDAQ as trading volumes declined from the prior session on negative breadth. There were no major technical events generated while the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive. However, there a few issues worthy of note that were part of our shift in outlook announced yesterday.
- Looking at the most widely followed indexes of the SPX (page 2), DJI (page 2), COMPQX (page 3) and NDX (page 3), all have seen significant rallies, almost vertical in nature, off of the December lows back to the November highs that offer important resistance. Those moves have now placed price well above their 50 DMAs that may imply they are extended.
- As well, over the past few sessions, the near term uptrend lines for the NDX, DJT (page 4) and RTY (page 5) were violated suggesting some possible weakening of trend. While these issues are not conclusive, they do suggest a heightening sense of vigilance may be appropriate, in our opinion.
The data is generally neutral including all of the 1 day McClellan OB/OS Oscillators (All Exchange:-27.36 NYSE:-28.07 NASDAQ:-29.2). Yet there are some issues we think are worth noting as well.
- Insiders are now selling at peak levels only seen two other times in the past decade with a17.8% Open Insider Buy/Sell Ratio (page 9). It is not an effective timing tool but shows a significant shift in insider activity from the market lows when they were very aggressive buyers.
- There has also been a notable narrowing in the valuation spread between the forward p/e for the SPX based on Bloomberg forward 12 month consensus earnings estimates of $167.43 versus the “rule of 20” fair valuation to 16.7 versus 17.3. This narrowing has occurred as estimates have declined as issuers have generally cut back their projections during the recent earnings season. While still comparatively undervalued, it is much less so than a few weeks ago.
In conclusion, we have some question as to how much upside is left over the near term for the reasons discussed above. As such, we are maintaining our “neutral/positive” near term outlook for the major equity indexes.