Some Options Data Turns Cautionary
Opinion: The majority of the indexes closed lower yesterday with mixed internals. Only the RUT managed to scratch out a fractional gain. Internals were negative on the NYSE and positive on the NASDAQ as volumes declined on both. The index charts saw tests of resistance that failed as all closed at or near their intraday lows. As well, the yield on the 10 year Treasury closed above its March high. While the data is mostly neutral, there are some cautionary signals coming from the options levels. As a result, we are near term neutral/negative while remaining cautious for the intermediate term.
- On the charts, only the RUT (page 4) closed barely higher yesterday. The rest of the indexes made early attempts at surpassing their resistance levels but all failed by closing lower and near their lows of the day. They remain confined in their respective trading ranges.
- What casts a shadow over their near term prospects, in our opinion, is the action in the U.S. 10 year Treasury yield and the U.S. Dollar. The 10 Year yield closed above its March high at 2.27% and above what we considered resistance at 2.25%. Technically, it implies higher bond yields. As well, the U.S. Dollar as measured by the UUP ETF closed fractionally high but “back kissed” its prior intermediate term uptrend line suggesting, in our view, the potential for further weakness there. As such the 10 Year and dollar may prove troublesome for the equity markets over the near and intermediate term.
- On the data, all of the McClellan OB/OS Oscillators are neutral (NYSE:-37.79/-12.5 NASDAQ:-8.97/-19.25). The only cautionary signals are coming from the options data. The Total Put/Call Ratio (contrary indicator) shows the crowd heavy in calls at .56 now that the markets have had a sizable bounce while the OEX Put/Call Ratio (smart money) finds the pros very long puts at 1.55 and expecting weakness as they view the bounce as completed. Thus, the data is sending a slightly negative short term message by our work.
- We remain concerned for the intermediate term as valuation remains extended, in our view, as the forward 12 month p/e for the SPX remains near a decade high at 17.1X IBES 12 month forward earnings estimates.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.83% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $122.80 versus the 10 Year Treasury yield of 2.27%.
SPX: 2,073/2,121
DJI: 17,827/18,205
COMPQX: 4,919/5,028
DJT: 8,541/8,802
MID: 1,495/1,523
RUT: 1,206/1,252