Short-Term Outlook Remains Neutral

Breadth Continues As Intermediate Term Concern

Opinion

Most of the indexes closed mixed yesterday with little progress being achieved in either direction. All of them closed near their intraday highs. No major chart signals were generated as all of the indexes remain within their current support/resistance levels. However, breadth remains poor and continues to be a concern. The data is largely neutral with the exception of some of the options data that are negative. As such, our short term outlook continues to be neutral with a slightly negative bias while breadth, valuation and leverage continue to keep us nervous for the more intermediate term.

• On the charts, the indexes closed mixed with mixed internals on the NYSE while the NASDAQ internals were slightly positive. Volumes dipped on the NYSE and Rose on the NASDAQ. No important technical signals were generated. The COMPQX (page 3) did manage to close above its short term downtrend line but remains below resistance. The DJT (page 3) is testing resistance but is now overbought from a stochastic perspective suggesting a violation above resistance may be difficult to achieve for the moment. All current support/resistance levels remained intact.

• Breadth continues to be a concern for us as the advance/decline lines for both indexes remain in a series of lower highs and lower lows in spite of the recent reflex rally over the past few days. We still see only 49.8% of the SPX components above their 50 DMAs as the index is only 20 points from a new high. As well, the MID and RUT have been acting poorly which are usually the better performing indexes within a healthy economy.

• The data is mostly neutral including the McClellan OB/O Oscillators (NYSE:+7.2/-3.66 NASDAQ:-25.25/-39.47). However, the options data is now cautionary with the Equity Put/Call Ratio (contrary indicator) showing the crowd very long calls post the rally at .50 while the pros measured by the OEX Put/Call Ratio (smart money) are loaded up with puts at 2.21 and expecting weakness. As such, the data has a slight negative tone this morning, in our opinion.

• In conclusion, the evidence suggests to us the near term remains neutral with a slightly negative bias while valuation, poor breadth and leverage levels keep us nervous for the intermediate term.

• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.96% forward earnings yield for the SPX based on 12-month IBES forward earnings estimates of $125.68 versus the 10-year Treasury yield of 2.27%.
• S&P 500: 2,063/2,109
• DJI: 17,376/17/842
• NASDAQ: 5,020/5,144
• Dow Jones Transportation: 8,127/8,444
• S&P Midcap 400: 1,454/1,505
• Russell 2000: 1,210/1,245