DJT Weakens
Opinion
We remain of the opinion that some degree of short term caution is warranted for the major equity indexes based on the current state of the charts and some data.
- Looking at the charts, all of the indexes closed lower yesterday, although some losses were fractional, on negative breadth and somewhat higher volumes than the prior session. From a “point” perspective, the declines were generally minimal. However, there are a few issues that continue to be of some concern, in our opinion.
- The DJT (page 3), as we have highlighted in the past few commentaries, actually showed the weakest performance among all of the indexes yesterday. This is not a significant event as it was only a one day occurrence. Yet, as we have discussed previously, the combination of our viewing it as the leading index for the markets in general along with its extended chart pattern that remains well above support as well as its uptrend line implies some downside vulnerability. Its stochastic saw a negative crossover yesterday to an overbought 92.52 as well, although it has yet to penetrate below the bearish 80 signal level.
- All of the stochastic levels for the other indexes are highly overbought as well while the RUT (page 4) actually saw a “bearish stochastic crossover” signal yesterday. So although there are not any “obvious” sell signals, we are sensing some level of risk appearing.
- The data remains almost entirely neutral including all of the McClellan OB/OS Oscillators. However, the OEX Put/Call Ratio (smart money) has registered a very bearish signal of 8.86. This level is so elevated that we wonder if there could have been a miscalculation. If not, the pros have become quite concerned by this measure. In contrast, the detrended Rydex Ratio (contrary indicator) shows the leveraged ETF traders returning to an overly bullish outlook at 1.26. So although the bulk of the data is neutral, there are some warning signs present.
- In conclusion, the weight of the evidence, in our opinion, is suggesting some near term caution may be appropriate for the near term prospects of the major equity indexes.
- For the longer term, we remain bullish on equities as they remain undervalued with a 6.44% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.94 versus the 10 Year Treasury yield of 2.59%.
SPX: 1,883/?
DJI: 16,400/?
NASDAQ: 4,175/4,274
DJT: 7,750/?
MID: 1,351/1,385
RUT: 1,116/1,147