McClellan 1 Day OB/OS Oversold
Opinion: The bulk of the indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as volumes dipped on the NYSE from the prior session as NASDAQ volumes rose. Further chart deterioration was seen as several closed below their near term support levels. The data remains split. As such, we remain of the opinion that a significant amount of risk is present in the markets versus potential reward as internals weaken, valuation is historically high, margin debt is excessive and investment advisors remain complacent.
- On the charts, only the DJT (page 3) managed to close in the green yesterday. And although the charts rallied off of their intraday lows, a number of negative signals occurred. The MID (page 4), RTY (page 4) and VALUA (page 5) all closed below their near term support levels while the RTY broke below its 150 DMA and the VALUA broke below its 50 DMA. The SPX (page 2) closed below its near term uptrend line but held support while the COMPQX (page 3) tested support. We now find the short term trends neutral on the SPX and COMPQX with the DJI positive and the rest in short term bearish downtrends. We would also note the cumulative advance/decline lines have turned negative on the All Exchange, NYSE and NASDAQ. As such, the technical picture for the indexes darkened.
- The data is mixed. The 1 day McClellan OB/OS Oscillators are oversold for the first time in quite some while as the 21 day levels are neutral (All Exchange;-71.04/+6.04 NYSE:-74.51/+29.51 NASDAQ:-67.06/-14.64). And while the Total and Equity Put/Call Ratios (contrary indicators) find the crowd now buying puts as concerns increase to bullish 1.06 and 0.83 respectively, the OEX Put/Call Ratio finds the pros heavily weighted in puts at 2.15 as they expect weakness to continue.
- In conclusion, with the market internal deterioration increasing, the fact that the forward valuation of the SPX based on forward 12 month earnings estimates from Bloomberg is back at a 15 year high with an 18.5 forward multiple, margin debt is at historically extreme levels up 20.5% y/y and investment advisors entering levels of emotional complacency as seen by the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.2/60.0, we remain of the opinion that a significant amount of downside risk is present in the markets currently versus potential reward.
- Forward 12 month earnings estimates for the SPX from Bloomberg of $134.01 leave a 5.53 forward earnings yield on a 18.5 forward multiple, over a decade high.
SPX: 2,465/2,481
DJI: 21,640/NA
COMPQX; 6,305/NA
DJT: 9,072/9,428
MID: 1,731/1,758
RTY: 1,385/1,433
VALUA: 5,512/5,609