Some Important Data Remains Cautionary
Opinion: Although no obvious sell signals are coming from the charts, their level of extension combined with some cautionary data, which we consider to be prescient in nature, suggest the higher probability over the near term is that of some retracement of the gains of the recent rally.
- On the charts, they went nowhere fast yesterday as they were, for the most part, little changed with negative internal breadth. As stated above, there are no obvious sell signals in the charts. Given the lack of sell signals, we would normally assume the continuation of the current trends were it not for some flashing red lights on the data dashboard.
- The McClellan OB/OS Oscillators are still bothersome as the NASDAQ 1 day and NYSE 21 day levels remain overbought at +80.15 and +80.49 respectively. The NASDAQ 21 day is mildly overbought at +50.72 while the 1 day NYSE is a neutral +29.16. In our opinion, the current OB/OS levels are high enough to be worthy of note. The OEX Put/Call Ratio (smart money) shows the pros very concerned regarding downside risk as they are heavily invested in puts at 2.65 while the “crowd” continues to whistle down its path of high expectations with a .52 Equity Put/Call Ratio (contrary indicator). The WST Ratio and its Composite are also bearish at 69.4 and 154.3 respectively.
- Finally the % of SPX stocks trading above their 50 DMAs has risen to 83.4%. One would think that is bullish. However, the fact is that levels such as the current one tend to be recorded near short term market peaks. So, we believe there is enough intensity coming from the data to be worthy of some concern.
- In conclusion, although the charts remain intact, their level of extension combined with potential warning signals from the data give us pause suggesting short term risk outweighs short term reward with some retracement of the recent rally gains likely.
- For the longer term, we remain bullish on equities as they remain undervalued with a 6.41% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.01 versus the 10 Year Treasury yield of 2.63%.
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