Short-Term Trends Remain Negative

Stochastic Readings Oversold

The indexes closed mostly lower Friday with negative internals on the NYSE while NASDAQ internals were positive. Volumes were light on the abbreviated session. The charts saw the DJI break support but the stochastic levels are now oversold. The data is a mix of neutral and positive readings. In spite of recent weakness, we are maintaining our near term “neutral” outlook for the major equity indexes for the reasons discussed below.

• On the charts, the bulk of the indexes closed lower Friday with the exception of the DJT (page 4) and RTY (page 5) posting gains. With most of the indexes declining, we find it interesting that the NASDAQ actually saw positive breadth and up/down volumes. The DJI (page 2) broke support while the rest of the charts held. Unfortunately, all of the charts remain in short term downtrends while the cumulative advance/decline lines remain negative and below their 50 DMAs. Yet there is some encouragement coming from the stochastic levels that are finally oversold on all of the indexes except the DJT. In fact, the SPX and DJI levels are down to single digits. While there is no assurance that the stochastics will prove meaningful, they historically oscillate between overbought and oversold, thus suggesting some potential for lift should they now reverse on their way back to overbought levels. No bullish crossovers have yet been triggered.

• The data remains a mix of neutral and positive readings. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-1.0/+1.11 NYSE:-16.45/+4.63 NASDAQ:+13.98/+1.18). All of the put/call ratios are bullish with the Total and Equity P/Cs (contrary indicators) at 1.12 and 0.85 with the crowd long puts while the pros are now long calls at a 0.68 OEX P/C as they bet on near term strength returning. The detrended Rydex Ratio (contrary indicator) still finds the leveraged ETF traders very leveraged short at -1.13 while insiders have been buying with an Open Insider Buy/Sell Ratio at 98.3, remaining neutral. Seasonality remains encouraging has the November to April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative. Valuation, assuming current estimates hold, is below fair value with the forward 12 month earnings estimates for the SPX via Bloomberg of $170.83, leaving the forward 12 month p/e for the SPX at 15.4 versus the “rule of 20” implied fair value of a 17.0 multiple. The “earnings yield” stands at 6.49%.

• In conclusion, the stochastic levels, valuation and insider buying versus crowd selling suggest we maintain our near term “neutral” outlook for the major equity indexes. Violations of resistance and downtrends are required to become more positive.
• SPX: 2,681/2,733
• DJI: 24,176/25,504
• Nasdaq: 6,998/7,324
• NDX: 6,616/6,900
• DJT: 10,347/10,746
• MID: 1,839/1,917
• Russell: 1,500/1,532
• VALUA: 5,936/6,243