Data Flashing Multiple Yellow Lights
Opinion: All of the indexes closed higher yesterday with positive internals as volumes rose from the prior session. All closed at or near their intraday highs. Several resistance levels were violated on a closing basis with the DJI making a new closing high. Thus the charts remain positive. However, the data has now moved to several cautionary extremes implying near term risk is elevated. As such, in spite of the positive chart structures, we are changing our near term outlook to “neutral” from our prior “neutral/positive” view.
- On the charts, all of the indexes closed higher with good internals on higher volume. Buyers remained active pushing the DJI (page 2) and SPX (page 2) to new closing highs. The DJT (page 3), MID (page 4), RUT (page 4) and VALUA (page 5) all closed above their respective near term resistance levels that have been adjusted below. The COMPQX (page 3) closed on resistance. So the charts continue to have a positive trend.
- However, we would note two points of interest. First, the short term uptrend lines for all of the indexes are almost vertical, a trend that is not sustainable. Second, although there have been no “bearish stochastic crossovers” generated, all of the stochastic readings are now heavily overbought. Said levels could decline with only sideways action in the markets. Yet they do imply, at least, a slowing of trend.
- It is the data now reaching multiple extremes that suggest upside is limited with risk entering the near term picture. It implies the crowd has now traded in their crash helmets for party hats. All of the McClellan OB/OS Oscillators are highly overbought (All Exchange:+98.68/+72.08 NYSE:+94.42/+94.91 NASDAQ:+109.51/+52.11) with the NASDAQ 1 day extremely so. The WST Ratio and its Composite ae both bearish at 67.5 and 156.8 while the Gambill Insider Buy/Sell Ratio shows insiders intensifying their selling at a bearish 7.4. In contrast, the Rydex Ratio (contrary indicator) at 56.9 finds the leveraged ETF players now heavily leveraged long. The one outlier is the OEX Put/Call Ratio (smart money) showing the pros long calls at 0.68 and expecting further strength. As such, the data scales, in our opinion, have tilted sufficiently cautionary to shift our near term outlook to “neutral”.
- In conclusion, in spite of the positive chart action, the data has too many warning signals to ignore, by our experience. This may just result in some sideways action. Nonetheless, we believe near term risk is now too elevated thus causing our near term outlook to turn “neutral”.
- Forward 12 month earnings estimates for the SPX from IBES of $125.35 leave a 5.82% forward earnings yield on a 17.2 forward multiple.
SPX: 2,080/NA
DJI: 17,722/NA
COMPQX; 4,854/4,970
DJT: 7,685/7,943
MID: 1,489/1,547
RUT: 1,158/1,224
VALUA: 4,692/4,895