Some Short-Term Downtrends Resume

Data Neutral

Opinion

All of the indexes closed lower yesterday with negative internals as volumes rose notably form the prior session on the NYSE and NASDAQ. While no support levels were violated on the charts, a number of short term downtrends were resumed on some of the indexes. The data is largely neutral with no strong directive implications. As such, we are maintaining our near term “negative” outlook for the major equity indexes as weakening chart patterns combined with questionable breadth, excessive margin levels and high historical valuation remain concerns, in our opinion.

• On the charts, all of the indexes closed lower yesterday on strong volumes and negative breadth, giving up all of their intraday gains after the FOMC minutes said stock prices were “quite high”. The intraday reversals were notable in terms of point shifts. While no support levels were violated, the MID (page 4), RTY (page 4) and VALUA (page 5) all closed back below their short term downtrend lines with the closing on support and below its 150 DMA. A break below said support on the RTY would darken the picture, in our opinion. As well, the COMPQX (page 3) yielded a “bearish stochastic crossover” signal. However, that signal would only become actionable if support is violated. So now all of the short term trends for the indexes are negative with the exceptions of the COMPQX and DJT (page 3) that are neutral.

• The data is now largely neutral including all of the McClellan OB/OS Oscillators (All Exchange:-5.21/+6.18 NYSE:-2.24/+25.31 NASDAQ:-41.59/-9.92). Both the Equity and OEX Put/Call Ratios are neutral at 0.61 and 1.35 respectively while the Total Put/Call Ratio (contrary indicator) is a bullish 0.92 as the crowd is slightly long puts. In our opinion, the data is inconclusive at this point.

• In conclusion, and at the risk of being redundant, we remain near term “negative” in our expectations for the major equity indexes as the charts have weakened, valuation of the SPX remains near historically high levels, margin debt has swelled to an all-time high, breadth remains questionable and investment advisors remain very complacent. In our view, potential near term reward does not warrant the possible risk that may be incurred.

• Forward 12-month earnings estimates for the SPX from IBES of $132.89 leave a 5.63 forward earnings yield on a 17.8 forward multiple, near a decade high.
• SPX: 2,342/2,373
• DJI: 20,528/20,865
• DJI: 5,795/5,923
• DJT: 8,906/9,188
• MID: 1,687/1,728
• Russell: 1,338/1,384
• VALUA: 5,342/5,477