Data Becomes More Split
Opinion: Yesterday’s action on slightly higher volume did see some of the indexes violate their respective short term resistance levels. Yet some of their short term downtrend lines remain intact. While there may be a bit more lift remaining over the near term, the small and mid-cap indexes underperformed yesterday as they had prior to the correction in the large caps. And with the data becoming more mixed in nature, we continue to believe there is a reasonable probability that recent correction may not have run its full course.
- On the charts, there were some improvements. The NYSE A/D closed back above its 50 DMA. Yet this is countered by the NASDAQ A/D remaining below its 50 DMA along with the unweighted ValueLine Composite. The SPX, DJI, DJT and COMPQX (pages 2-3) all closed above their near term resistance levels. Yet the SPX and DJI remain in their short term downtrends. Neither the MID or RUT wear able to break resistance. So there were some improvements. However, as volumes were relatively light, we suspect that while the bounce may have a bit further to go, said bounce may be one within a correction not yet completed.
- The data has become a bit more mixed. The McClellan OB/OS Oscillators are all neutral (NYSE:+31.75/-11.5 NASDAQ:+34.92/-21.27) giving no guidance. Most of the other data remain neutral as well. However, we are now getting a warning signal from the OEX Put/Call Ratio (smart money) suggesting the pros believe the recent bounce has run its course with a high and very bearish 2.93 reading.
- In conclusion, while we believe there may be a bit more upside in the current bounce, the volumes encountered during its lift have been far from impressive suggesting buying interest has actually not been very strong. As such, there is the possibility that the recent gains have been a weak countertrend within a correction that has not yet produced enough fear to create a bottom.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.55% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.60 versus the 10 Year Treasury yield of 2.41%.