Charts Continue To Improve
Opinion: All of the indexes closed higher Friday with positive internals as volumes increased from the prior session. All closed near their intraday midpoints. Several chart improvements appeared including some violations of resistance as well as moving averages. No sell signals were generated. Nonetheless, we are shifting our near term outlook to “neutral/negative” as the data caution signals have intensified to the point of suggesting near term risk/reward is now turning negative. Significant gains have been made over the past three weeks that could be vulnerable to some near term profit taking. Our intermediate term outlook remains neutral/positive as market breadth continues to improve. However, valuation is now returning to its upper limits.
- On the charts, all closed higher Friday but at their midpoints instead of intraday highs seen in several prior sessions suggesting some slowing of momentum. The SPX (page 2) closed above resistance along with the VALUA (page 5). As well, the SPX, DJI (page 2) and MID (page 4) closed above their 150 DMAs while the DJT (page 3) closed marginally above its yearlong downtrend line. The stochastic levels remain very overbought but have yet to generate bearish crossover signals.
- It is the data that is causing us increased near term concern. The 1 day McClellan OB/OS Oscillators remain extremely overbought (All Exchange:+138.48 NYSE:+156.29 NASDAQ:+124.28) while the 21 day levels are now all overbought as well. Although most of the put/call ratios are neutral, the ISEE Put/Call Ratio has now turned a bearish 15.4 with the Gambill Insider Buy/Sell Ratio slipping into neutral territory at 22.8 as their buying appetite has slowed notably from the past few weeks. While the OB/OS levels are the only truly red lights at this point, they are now at levels strongly suggesting some vulnerability as the rest of the data moderates as well.
- In conclusion, we are now of the near term opinion that some digestion/weakness of the recent gains is the higher probability and some degree of near term caution should be exercised. Breadth continues to improve for the intermediate term but we would note that valuation has now moved back to its upper ranges and should be monitored.
- Forward 12 month earnings estimates for the SPX from IBES of $122.69 leave a 6.13% forward earnings yield on a 16.3 forward multiple.
SPX: 1,934/2,006
DJI: 16,495/17,122
COMPQX; 4,560/4,715
DJT: 7,057/7,662
MID: 1,320/1,399
RUT: 1,035/1,107
VALUA: 4,083/4,437