Market Internals Turn More Negative
Opinion
The charts suffered some damage yesterday as all of the indexes closed lower and at their lows of the day. Internals remained very weak suggesting continued institutional distribution. However, although we see no encouraging signs as yet regarding an internal strengthening of the markets, the NYSE 1 day McClellan OB/OS Oscillator is very oversold suggesting a possible bounce/pause within the current correction.
- On the charts, decliners again well outpaced advances with negative volume characteristics. The DJI (page 2), DJT (page 3) and MID (page 4) all closed below their respective near term support levels while the RUT (page 4) closed below its long term uptrend line from November of last year. Internals remain terrible as the All-Exchange, NYSE and NASDAQ A/Ds made lower lows and remain below their 50 DMAs. The ValueLine Arithmetic index is close to breaking its 200 DMA. In our opinion, the only positive issue to be gleaned from the charts is there has now been a notable drop in price pushing the MID and RUT stochastic readings into very oversold levels.
- On the data, almost all of it is neutral and thus yet to show much in the way of bottoming signals. However, there is one encouraging note coming from the 1 day McClellan OB/OS Oscillators. The NASDAQ 1 day is an oversold -87.06 while the NYSE is very oversold at -107.24. Readings below -100 can suggest near term bounce potential. Yet caution is still being signaled from sentiment as the Rydex Ratio (contrary indicator) continues to show the leveraged ETF traders as turning a blind eye to the market weakness and still overly optimistic at 56.5. However, the NYSE OB/OS could be the dominant short term signal.
- In conclusion, while the OB/OS are suggesting potential for a pause/bounce near term, any relief would be within an ongoing deterioration of the general markets unless there is a notable shift to the positive regarding market breadth and volume, in our view.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.48% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.46 versus the 10 Year Treasury yield of 2.54%.
- SPX: 1,979/?
- DJI: 17,009/17,162
- NASDAQ: 4,481/4,594
- DJT: 8,398/?
- MID: 1,376/1,427
- RUT: 1,116/1,159