COMPQX At New Closing High
Opinion: All of the indexes closed higher yesterday with positive internals as volumes rose from the prior session. Some positive technical events occurred on the charts while the cumulative advance/decline lines remain mostly negative. The data has turned largely neutral with the prior McClellan OB/OS Oscillator oversold conditions being relieved. The short term trends for the indexes are mixed. So in spite of yesterday’s chart improvements, our concerns regarding a narrowing of market breadth on advances combined with historically extended valuation of the SPX continue to suggest to us that risk remains elevated compared to potential reward, leaving our near term view “neutral/negative”.
· On the charts, yesterday’s advances came on good breadth and positive volumes. The SPX (page 2) closed above near term resistance while the COMPQX (page 3) made a new closing high. The RTY (page 4) and VALUA (page 5) closed back above their 50 DMAs leaving only the DJT (page 3) below that level. Short term trends are mixed with the SPX and COMPQX positive, the DJT negative and the rest neutral. What remains a concern on the charts is the fact that even with the recent achievements, both the All Exchange and NASDAQ cumulative advance/decline lines remain negative and below their 50 DMAs. Only the NYSE A/D is positive. In our opinion, this describes a continuing deterioration of market breadth where money is chasing fewer and fewer stocks as the focus turns to a selective group pf large cap issues. Such deterioration is typically seen near the peak of a market move.
· The data is now almost completely neutral as the McClellan 1 day OB/OS Oscillators have spent a good portion of their oversold fuel and are now neutral (All Exchange:-50.69/-26.26 NYSE:-19.9/-11.9 NASDAQ:-16.41/-20.21). All of the put/call ratios have turned neutral as well from their prior bullish signals (Total:0.71 Equity:0.61 OEX:1.27). The Gambill Insider Buy/Sell Ratio remains a neutral 11.2.
· In conclusion, there may still be a bit more upside momentum as the data is not yet cautionary and animal spirits are running high. However, we continue to be of the opinion that the narrower large cap index strength is masking an underlying weakening of the overall market while valuation remains at extended historical levels. Should our analysis prove correct, it suggests a potentially negative risk/reward scenario. We remain near term “neutral/negative” in our short term outlook.
· Forward 12 month earnings estimates for the SPX from IBES of $133.18 leave a 5.6 forward earnings yield on a 17.9 forward multiple, over a decade high.
SPX: 2,360/2,396
DJI: 20,761/20,957
COMPQX; 5,804/NA
DJT: 9,045/9,416
MID: 1,697/1,744
RTY: 1,358/1,383
VALUA: 5,354/5,452