McClellan OB/OS Oscillators Remain Overbought
Opinion
A few of the indexes made new highs yesterday as volumes fell notably. So although we have yet to see any sell signals coming from the charts, the extremity of crowd bullish sentiment in combination with the McClellan Oscillators being overbought and forward valuations at a decade peak continue to suggest to us that near term risk is palpable for the equity indexes.
- On the charts, results were mixed yesterday as volumes shrank. Internals were positive on the NYSE but the NASDAQ A/D was negative. The SPX (page 2) and DJI (page 2) managed to squeeze out new fractional closing highs in literally the last minute of trading. The COMPQX (page 3) made a new 14 year closing high as well while the DJT (Page 3) closed lower. The overall action given the lack of volume, narrowing breadth, minimal gains and the “last minute rescue” have a tone of possible exhaustion, in our opinion. Yet we would note no technical sell signals exist on the charts at this point.
- The data is what continues to be of concern. Now that the “crowd” is tripping over themselves to be long as noted by the peak Rydex Ratio (contrary indicator) of 63.4 showing the leveraged ETF traders to be heavily long, we find the markets vulnerable regarding the McClellan OB/OS Oscillators. The NYSE 21 day OB/OS is extremely overbought at +121.4 with the NASDAQ 21 day at +87.16 is at its most overbought level since last March. The 1 day levels remain overbought as well at +64.89 and +52.44 respectively. The pros measured by the OEX Put/Call Ratio (smart money) are heavy in puts at 1.73 expressing their expectations of weakness. So the OB/OS and sentiment levels remain quite concerning in our view.
- The forward 12 month First Call Estimates for the SPX were raised from $127.17 to $127.99 but that still leaves the forward SPX P/E at a decade high of 15.9 suggesting stocks are as rich as they have been in quite some time, yet another concern. As such we remain cautious for the near term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.27% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.99 versus the 10 Year Treasury yield of 2.36%.
- S&P 500: 2,000/?
- Dow 30: 17,283/?
- NASDAQ Composite: 4,568/?
- Dow Jones Transportation: 8,772/?
- S&P Midcap 400: 1,420/1,439
- Russell 2000: 1,159/1,184