Some Cautionary Signals Remain

Markets Bounce On Light Volume

• Opinion: We remain of the opinion that some degree of short term caution is warranted regarding the prospects of the major equity indexes. Some cautionary data remains on the table while Friday’s bounce occurred on very light volume versus the prior session’s higher volume decline.

• On the charts, as noted above, Friday’s bounce in the markets in response to Thursday’s decline came on very light trading volume suggesting buying appetites were not actually all that strong. Bearish stochastic crossover signals persist on all of the indexes as well while the SPX (page 2), DJI (page 2) and DJT (page 3) all remain below their short term uptrend lines that were violated Thursday. Although these are not major technical factors, they do tip the scale slightly to the negative, in our opinion.

• Looking at the data, a good portion of it remains neutral including 3 of the 4 McClellan OB/OS Oscillators with the 21 day NYSE being the bearish exception at an overbought 66.06. However, the OEX Put/Call Ratio (smart money) is still flashing a glaring red light as the pros are about as heavily invested in puts as we have seen all year at 2.2 on the 1 day and 2.48 on the 15 DMA. They are betting heavily on their expectation of some near term market weakness. The detrended Rydex Ratio (contrary indicator), in contrast, still shows the leveraged ETF traders as overly bullish at 1.33.

• In conclusion, although our search for evidence to foresee the near term market outlook is somewhat sparse, our evaluation of the landscape continues to suggest some near term market weakness may be the higher probability.

• For the longer term, we remain bullish on equities as they remain undervalued with a 6.46 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.01 versus the 10 Year Treasury yield of 2.6%.

• S&P 500: 1,888/???
• Dow 30: 16,547/???
• NASDAQ: 4,225/4,352
• DJT: 7,750/???
• MID: 1,370/???
• RUT: 1,133/1,189