Data Remains Mostly Cautionary
Opinion
Friday’s action left the indexes with mixed results. In, our opinion, the internals and charts may be starting to show some signs of fatigue. Meanwhile, the data scales continue to tilt in the cautionary direction. As such, we remain of the opinion that a respectable amount of risk exists for the equity markets in general over the near term.
- On the charts, there were still no sell signals flashed from Friday’s trading. In fact, the SPX (page 2) made a new fractional closing high while the COMPQX made a new closing 14 year high. However, the balance of the indexes closed lower on the day. When we take a look under the hood, we believe there are some possible signs of fatigue beginning to emerge. While the COMPQX made its move higher, its A/D was negative as volumes declined. As well, up volume was below levels seen over the last several sessions as the COMPQX moved higher. These are not “major” signals but do suggest lessening of momentum. Volumes on the NYSE were fairly anemic as well, although breadth and volume were both positive. As the balance of the indexes closed lower, we suspect we are again seeing an increasingly selective market as opposed to one gaining with increasing participation.
- Looking at the data, The 21-day McClellan OB/OS Oscillators remain overbought (NYSE:+100.3/NASDAQ+62.49) with the NYSE extremely so. Their 1 day levels remain neutral (NYSE+22.6/NASDAQ+19.91). The pros have increased their concerns of near term weakness as the OEX Put/Call Ratio (smart money) is very bearish at 2.42 while the “crowd” seen via the Rydex Ratio (contrary indicator) remains euphoric at 62.1. The Equity Put/Call Ratio (contrary indicator) is sending a similar crowd message at .53 as they are heavy calls.
- The forward 12 month p/e for the SPX of 15.9X based on First Call estimates also remains at the top end of its 10 year range adding some concern.
- In conclusion, although outright technical sell signals remain elusive, recent action may be unveiling some signs of fatigue as the data continues to suggest near term risk exists.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.27% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.99 versus the U.S. 10-Year yield of 2.32%.
- S&P 500: 2,015/?
- Dow 30: 17,283/?
- NASDAQ Composite: 4,593/?
- Dow Jones Transportation: 8,772/?
- MID: 1,420/1,439
- Russell 2000: 1,159/1,186