Short Term Outlook Turns “Neutral”
Opinion: All of the indexes closed notably lower Friday with negative internals on heavy volume. All closed at or near their intraday lows. Multiple negative events occurred on the charts including violations of support on every index. However, the data remains a mixed bag of signals that now has a slightly positive tone. In spite of the damage suffered during the last session, we are shifting our near term outlook only to “neutral” from our prior “neutral/positive” view due to reasons discussed below.
- On the charts, all of the indexes closed lower Friday on very heavy volume and broadly negative breadth as portfolios were jettisoned as a result of the Brexit vote. All of the index charts (pages 2-5) broke below their near term support levels as all also closed below their 50 DMAs. The DJI (page 2) and COMPQX (page 3) also closed below their intermediate term uptrend lines. However, the extent of the damage in concert with the overwhelming volume could imply that the large majority of potential “supply” may have already been spent.
- The data has a slightly positive tone although the McClellan OB/OS Oscillators, to our surprise, only saw manor movement as all remain neutral (All Exchange:-36.56/+16.26 NYSE:-31.53/+41.88 NASDAQ:-42.08/-10.35). We would have thought some oversold levels may have been generated. The positive tone comes from psychology as the Total and Equity Put/Call Ratios (contrary indicators) show the crowd very nervous and heavy in puts at 1.24 and 1.01 respectively. The OEX Put/Call Ratio (smart money) at 0.87 shows the pros slightly weighted to calls and expecting some possible near term lift. The most recent AAII Bear/Bull Ratio (contrary indicator) echoes the total end equity p/c messages as bears well outnumber bulls at 35.23/21.97. The Gambill Insider Buy/Sell Ratio still shows the insiders slightly on the buy side at 20.4. It will be very important to see if they step up their buying as a result of the recent price declines.
- In conclusion, while the charts have taken some technical hits. The depth, breadth and velocity of the decline may have rung a good deal of supply out of the system already. When combined with the data, we are inclined to move our near term outlook only to “neutral” instead of what might be expected to be a “negative” call.
- Forward 12 month earnings estimates for the SPX from IBES of $125.78 leave a 6.17% forward earnings yield on a 16.2 forward multiple.
SPX: 2023/2066
DJI: 17,260/17,575
COMPQX; 4,681/4,780
DJT: 7,215/7,523
MID: 1,436/1,478
RUT: 1,116/1,147
VALUA: 4,546/4,632