Rydex Ratio Shows Excessive Bullishness
Opinion: All of the indexes closed lower yesterday with negative internals as volumes dropped from the prior session. Most closed at or near their intraday trading lows. No violations of support were registered on the index charts while the data remains mostly neutral but with some issues of concern intensifying. We have yet to see enough of a shift in the evidence to alter our current near term “neutral” outlook for the major indexes, in spite of some growing concerns, while extended forward valuation of the SPX keeps the intermediate term view “neutral” as well.
· On the charts, all of the indexes closed lower yesterday and near their intraday lows with negative internals as volumes declined. No important chart action was noted on the index charts as the SPX (page 2), DJI (page 2) and COMPQX (page 3) remain in their current short term uptrends while the rest of the indexes are trading sideways after violations of their uptrends last week. However, there is one point of concern worth noting in relation to the VIX (page 9). As can be seen on the chart, we suspect the VIX may have put in a “hammer bottom” formation yesterday as it saw a temporary intraday violation of support but rallied enough to close near the upper end of its intraday range. Such chart formations seen after a protracted downtrend, in this case since the beginning of November, imply the culmination of said downtrend. The formation now suggests the higher probability of volatility reentering the markets usually accompanied by price weakness. The fact that all of the indexes remain extended above their 50 DMAs continues to be a concern as well.
· The data finds all of the McClellan OB/OS Oscillators at neutral (All Exchange:+18.19/+46.14 NYSE:+22.83/+49.51 NASDAQ:-0.9/+30.76) along with the OEX Put/Call Ratio (smart money) at 1.34. With the rest of the data largely neutral, there are two points of concern worth noting. The Rydex Ratio (contrary indicator) is at a peak of leveraged ETF bullish sentiment not seen since June of 2015 at 72.5. The prior peak was followed just over one month later by some notable market weakness. In sharp contrast to the Rydex, the Gambill Insider Buy/Sell Ratio remains bearish at 8.5 as insiders continue to use current market strength as a selling opportunity. They have little to no interest in chasing current prices according to this measurement.
· In conclusion, there has not been enough of a shift in the current chart structures to alter our near term “neutral” outlook for the major indexes, in spite of concerns noted above. The intermediate term view remains “neutral” as well.
· Forward 12 month earnings estimates for the SPX from IBES of $131.02 leave a 5.79 forward earnings yield on a 17.3 forward multiple, a 12 year high.
SPX: 2,199/NA
DJI: 19,115/NA
COMPQX; 5,306/NA
DJT: 9,041/9,381
MID: 1,618/1,690
RTY: 1,350/NA
VALUA: 5,170/5,374