Data Suggests Bounce
Opinion: Most of the indexes closed lower yesterday with negative internals, the exception being the DJT. Volumes declined from the prior session on the NYSE and increased on the NASDAQ. Two more indexes violated their short term support levels as others tested support. Although the charts and internals remain poor, the data is now suggesting the high probability of a near term bounce. As such, we remain near term “neutral” in our short term outlook for the major indexes. Violations of downtrends would be required to become more optimistic. Forward valuation of the SPX is still in its historically high range, leaving the intermediate term view also at “neutral”.
· On the charts, poor internals left only the DJT (page 3) higher on the day. Negative action was seen on the MID (page 4) and VALUA (page 5) as both closed below their near term support levels. The advance/decline lines for all of the indexes remain negative as well. The SPX (page 2) tested support with the DJI (page 2) and COMPQX (page 3) closing on support. Some slight encouragement is coming from the stochastic levels that are oversold on the SPX, COMPQX, MID and VALUA. However, bullish crossover signals have yet to appear. More importantly, the series of lower highs on all of the indexes that have been in place for the past few weeks need to be reversed for the charts to take on a more positive tone.
· On the opposite side of the fence, the data is now suggesting a short term bounce has a reasonably high probability of occurring. The 1 day McClellan OB/OS Oscillators are now very oversold (All Exchange:-107.02 NYSE-112.5 NASDAQ:-105.16) with the 21 day levels remaining oversold (All Exchange:-74.34 NYSE:-66.39 NASDAQ:-82.35). These are the most oversold conditions seen since last January and just prior to an important rally. The Total and Equity Put/Call Ratios (contrary indicators) find the crowd extremely nervous and very heavy in puts at 1.31 and 0.99 while the pros measured by the OEX Put/Call Ratio (smart money) have now reversed course away from heavy put exposure to now being long calls at 0.74 as they expect some market strength. In our opinion, the message from the data scales has now tilted sufficiently to the bullish side for the near term.
· In conclusion, while the charts and market breadth remain in poor condition, that data now implies some near term relief might be expected. Yet until we see some improvement in breadth and chart action, we will keep our near term view at “neutral”.
· Forward 12 month earnings estimates for the SPX from IBES of $128.94 leave a 6.15 forward earnings yield on a 16.3 forward multiple.
SPX: 2,100/2,144
DJI: 17,956/18,287
COMPQX; 5,109/5,240
DJT: 7,954/8,144
MID: 1,475/1,516
RTY: 1,190/1,235
VALUA: 4,687/4,830