McClellan 1 Day OB/OS Oscillators Oversold
Opinion: All of the indexes closed lower yesterday with negative internals as volumes dipped on the NYSE and rose slightly on the NASDAQ. Near term support levels were violated on three of the indexes as advance/decline lines continued to deteriorate. The data remains mixed but now finds all of the 1 day McClellan OB/OS Oscillators oversold. However, in spite of the current OB/OS oversold conditions, the breaks in some of the charts combined with extended valuation and investment advisor complacency suggest an unappealing near term risk/reward scenario resulting in our shifting our near term outlook for the major equity indexes from “neutral” to “neutral/negative”.
On the charts, all of the indexes closed lower yesterday and near their intraday lows with negative internals on modest trading volume. The DJT (page 3), MID (page 4) and RTY (page 4) all closed below their respective near term support levels while the RTY closed below its 50 DMA as well. The SPX (page 2) closed below its short term uptrend line. The advance decline lines for the All Exchange, NYSE and NASDAQ are in short term downtrends with the NASDAQ A/D (page 9) closing below its 50 DMA. This presents evidence of market breadth continuing to weaken.
The data scales are somewhat evenly balanced. On the positive side, all of the McClellan 1 day OB/OS Oscillators are oversold (All Exchange:-68.81/+11.4 NYSE:-89.37/+7.93 NASDAQ:-72.83/-10.77) suggesting some pause or bounce from the recent weakness. On the negative side, the Equity Put/Call Ratio (contrary indicator) finds the crowd eager to buy any dips as they are heavy in calls at 0.54 while the pros measured by the OEX Put/Call Ratio expect further weakness and are loaded in puts at 2.34. The Gambill Insider Buy/Sell Ratio remains neutral at 10.2.
In conclusion, given the weakening of technical chart pictures and deterioration in breadth, we are inclined to change our near term outlook for the major equity indexes to “neutral/negative” from our prior “neutral” view. We would add that forward valuation of the SPX at a historically extended 17.9 forward multiple based on forward 12 month IBES earnings estimates combined with overly bullish investment advisor sentiment via the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.5/63.1 presents a poor risk/reward scenario at present. We have also seen a surge in margin exposure from 6% to 15% on a year/year comparison.
Forward 12 month earnings estimates for the SPX from IBES of $132.19 leave a 5.58 forward earnings yield on a 17.9 forward multiple, over a decade high.
SPX: 2,365/NA
DJI: 20,761/NA
COMPQX; 5,804/5,871
DJT: 9,281/9,494
MID: 1,697/1,744
RTY: 1,359/1,384
VALUA: 5,387/5,528