Some Data Moderates
Opinion: All of the indexes, with the exception of the DJI, closed lower yesterday with negative internals as volumes rose on the NYSE and declined on the NASDAQ. There were no technical violations of import on the charts, in our opinion, while some of the data moderated in response to the action. The net result was there was not enough of a shift to alter our near term “neutral” outlook for the indexes as the charts remain positive but extended while psychology remains cautionary. Historically high forward valuation of the SPX keeps the intermediate term view also “neutral”.
· On the charts, the negative action yesterday was not sufficient to alter the current uptrends of any of the indexes. The DJI (page 2) was the only gainer as it made yet another new closing high. Internals were quite negative but the charts were relatively unfazed. As such, their uptrends remain intact. Our primary concern regarding the charts is the degree of extension above their 50 DMAs, except for the COMPQX (page 3) that is only moderately extended. Repeating our prior thoughts in this regard, such extensions are typically followed by several days or weeks of sideways trade or a decline in price that tests the 50 DMA. So although the charts remain positive, the 50 DMAs imply some degree of potential risk.
· The 1 day McClellan OB/OS Oscillators moderated, as a result of yesterday’s weakness, to the point of the NYSE and NASDAQ levels dropping to neutral at +42.12 and +35.12 respectively. The All Exchange is mildly overbought at +55.23. Psychology is now our primary concern as the crowd is now, in our opinion, overly bullish while insiders continue to see the recent rise as a selling opportunity. Both the AAII Bear/Bull Ratio and Investors Intelligence Bear/Bull Ratio (contrary indicators) show the crowd and advisors at dangerously optimistic levels of 29/43 and 19/59 respectively. In contrast, the Gambill Insider Buy/Sell Ratio has fallen deeper into bearish territory at 7.4 as insider selling continues to dominate their activity.
· In conclusion, we find ourselves forced to continue our “neutral” short term outlook given the equal and opposing signals from the charts and data. The forward valuation of the SPX back at historic highs keeps the intermediate term view “neutral” as well.
· Forward 12 month earnings estimates for the SPX from IBES of $130.94 leave a 5.79 forward earnings yield on a 17.3 forward multiple.
SPX: 2,199/NA
DJI: 19,115/NA
COMPQX; 5,306/5,400
DJT: 9,041/NA
MID: 1,618/NA
RTY: 1,334/NA
VALUA: 5,170/NA