McClellan OB/OS Oscillators OversoldOpinion
Our expectations of a continuation of Monday’s bounce expressed in yesterday’s note were wrong. All of the indexes closed notably lower with negative internals on the NYSE and NASDAQ as volumes rose from the prior session on the NYSE and were flat on the NASDAQ. However, no support levels were violated but all of the near term downtrends remain intact. Yet in spite of yesterday’s action, we remain of the opinion that some degree of near term relief may be expected due to some of the index stochastic levels discussed below as well as s good portion of the data. However, in spite of our bounce anticipation, we remain formally “neutral” on the indexes unless we see some violations of resistance and downtrends on the charts.
- On the charts, all of the indexes closed lower yesterday with negative internals on both exchanges. All closed at or near their intraday lows. However, while the declines were notable, none of the near term support levels were violated. All of the short term trends remain negative and below their respective 50 DMAs as do the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ. So why are we still expecting some follow up strength from Monday’s action?
- The chart of the NDX on page 9 shows the deeply oversold condition of its stochastic reading. All of the index charts are in the same condition. What we believe is of import is the fact that in the case of the NDX, as noted, it has seen similar stochastic conditions 6 six times over the past year. In every case, the index saw a subsequent rally of varying degrees. The same can be said for the SPX with the difference that these conditions only presented themselves 3 times over the past year. Subsequent rallies were seen on the SPX each time as well.
- The data is also offering some encouragement. All of the McClellan 1 day OB/OS Oscillators are oversold (All Exchange:-72.01/-32.76 NYSE:-66.49/-33.47 NASDAQ:-81.15/-30.6) with the 21 day levels neutral. The Total and Equity Put/Call Ratios (contrary indicators) are bullish as well at 1.07 and 0.71 respectively with the OEX P/C a neutral1.23. The OpenInsider Buy/Sell Ratio, while remaining neutral, has seen a notable pickup in insider buying from 34.1 last week to a current 68.0. They have been buying the weakness.
- In conclusion, the issues discussed above suggest to us some relief may be on the way. However, resistance levels and downtrends need to be overcome to alter our formal “neutral” outlook for the major equity indexes.
Forward 12-month earnings estimates for the SPX from Bloomberg are $157.70 leaving a 6.0% forward earnings yield on a 16.6 forward multiple.