Data Turns More Cautionary
The indexes closed mixed Thursday with positive internals on the NYSE and NASDAQ as trading volumes rose from prior levels on both exchanges. The charts saw four of the indexes violate resistance to the upside turning their trends from neutral to positive. Yet while the charts showed some improvement, the data dashboard has become more cautionary. As such, while the charts are saying we should maintain our near term “positive” outlook for the major equity indexes, the data is suggesting the potential for some consolidation/retracement of the recent gains has increased. It may be a time to curb some enthusiasm.
On the charts, the indexes closed mixed yesterday with the DJI (page 3) and DJT (page 4) declining as the rest advanced. Breadth and up/down volumes were positive. On the plus side, the SPX (page 2), COMPQX (page 3), NDX (page 3) and MID (page 4) closed above short term resistance, turning their near term trends back to positive from neutral. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive as well. So there is little to complain about strictly from a chart basis except that the % of SPX stocks trading above their 50 DMAs (page 9) has elevated to 76.6%. Counterintuitively, it is approaching levels that have sometimes been associated with stalls or retracements as noted on the chart.
Our concerns are coming from the data side of the equation. All of the McClellan OB/OS Oscillators are nicely overbought (All Exchange:+99.06/+129.41 NYSE:+119.39/+160.28 NASDAQ:+80.97/+102.69). As well, the crowd is now heavy in calls via the Equity Put/Call Ratio (contrary indicator) at a bearish 0.53 while the pros measured by the OEX Put/Call Ratio are up to their eyeballs in puts at a very bearish 3.75. The detrended Rydex Ratio (contrary indicator) has moderated to a mildly bullish -0.88 versus its extremely bullish -3.78 from a few weeks ago as the leveraged ETF traders have completed a significant amount of their short covering. Valuation still seems to be appealing as it remains below fair value, in spite of the forward 12 month earnings estimates for the SPX via Bloomberg dipping to $168.71, leaving the forward 12-month p/e for the SPX at 16.0 versus the “rule of 20” implied fair value of a 17.4 multiple. The “earnings yield” stands at 6.24%.
In conclusion, the charts have yet to flash any notable cautionary signals, thus suggesting we maintain our near term “positive” outlook for the indexes. However, the data has increased its intensity suggestive of some pause/retracement of January’s gains. It’s a time to keep bullish emotions tempered, in our opinion.