Charts & Data In Opposition
Opinion: All of the indexes closed higher yesterday with positive internals as volumes rose on both exchanges. All of the indexes, with the exception of the COMPQX, made new closing highs. However, the data continues to send a number of cautionary signals. Given the strength behind yesterday’s move and the improvement in market breadth, while the data continues to suggest some degree of caution, the charts are difficult to ignore. As such, we are shifting our near term outlook to “neutral” from “neutral/negative”. The forward valuation of the SPX at a new historic high of 17.3 keeps the intermediate term view at “neutral”.
· Our expectations of some near term weakness expressed in yesterday’s comments proved to be mistaken as the index charts saw significant gains on strong volume and breadth. All closed near their highs of the day with all but the COMPQX (page 3) making new closing highs. The COMPQX did manage to close above near term resistance. All of the advance/decline lines have turned positive and are above their 50 DMAs. So all looks good on the charts with one troubling factor. As noted yesterday, all of the indexes, with the exception of the COMPQX, are quite extended above their 50 DMAs. Historically, those conditions are usually resolved by either sideways or negative price action. The low level of the VIX (page 9) implies that likelihood. Yet until some sell signals are generated on the charts, all of the uptrends remain intact and positive.
· The data continues to send a somewhat opposing message as all of the McClellan OB/OS Oscillators are overbought (All Exchange:+62.18/+82.8 NYSE:+90.13/+80.4 NASDAQ:+64.38/+89.81). The WST Ratio/Composite is bearish at 80.5/176.7 along with the Equity Put/Call Ratio (contrary indicator) that now finds the crowd heavily over weighted in calls at 0.46. On the other side of the scale, the pros that were heavily weighted in puts yesterday and on the wrong side of the trade have flipped to being heavy in calls with a 0.75 OEX Put/Call Ratio (smart money). So the data continues its cautious tone.
· In conclusion, we find ourselves in a conundrum. The charts say “up” while the data, extensions above the 50 DMAs, VIX and valuation say “caution”. So we find ourselves forced to move to a “neutral” near term outlook from our prior “neutral/negative” view. Chart weakness needs to appear for the message to clarify.
· Forward 12 month earnings estimates for the SPX from IBES of $129.74 leave a 5.8 forward earnings yield on a 17.3 forward multiple.
SPX: 2,182/NA
DJI: 18,932/NA
COMPQX; 5,242/5,400
DJT: 9,041/NA
MID: 1,618/NA
RTY: 1,334/NA
VALUA: 5,170/NA