Short Term Outlook Remains “Neutral”
Opinion: All of the indexes closed higher Friday with positive internals on lower volumes due to the shortened session. All closed at or near their intraday highs with more new closing highs achieved. However, we are of the opinion that the likelihood of some retracement of the recent gains is increasing, largely due to overbought McClellan OB/OS oscillator conditions, extended stochastic readings and volatility nearing historic lows. So although remaining near term “neutral” due to a lack of sell signals on the charts, we believe the probabilities of some retracement of gains is increasing. Extended valuation of the SPX keeps our intermediate view “neutral” as well.
· On the charts, all of the indexes closed higher Friday with positive internals and all making new closing highs, with one exception. The DJT (page 3) has yet to achieve that milestone but did manage to close above resistance last Wednesday. All of the uptrends remain intact with no apparent sell signals on the charts. However, all of the stochastic levels are at the top end of their overbought ranges while the VIX (page 9) shows volatility near historically low levels that typically precede periods of higher volatility and lower prices for the indexes. Given the near vertical nature of the recent rally, a retracement of some of the gains would be normal.
· On the data front, while several points remain neutral, the 1 day McClellan OB/OS Oscillators are all overbought (All Exchange:+86.33 NYSE:+88.81 NASDAQ:+99.38 while the NASDAQ 21 day has slipped into bearish territory at +51.22 as well. We also find insiders stepping up their selling activity with the Gambill Insider Buy/Sell Ratio nearing bearish territory at 11.3. These warning signals are staring to intensify.
· In conclusion, only the charts are keeping us from becoming more concerned about the near term prospects for the major equity indexes. The issues discussed above suggest the markets are near to running out of upside fuel that has a reasonable probability of resulting in weaker prices for the indexes over the near term.
· Forward 12 month earnings estimates for the SPX from IBES of $129.72 leave a 5.89 forward earnings yield on a 17.0 forward multiple.
SPX: 2,165/NA
DJI: 18,603/NA
COMPQX; 5,242/NA
DJT: 8,736/9,140
MID: 1,583/NA
RTY: 1,300/NA
VALUA: 5,094/NA