Sentiment Turns More Cautionary
Opinion: Yesterday’s bounce for the major equity indexes took place on lighter volume while having no notable impact on the charts. Meanwhile, the sentiment data has now become more cautionary. The combination of Tuesday’s high volume weakness combined with the sentiment data suggests some potential for more near term weakness for the indexes, in our opinion.
- On the charts, while all of the indexes managed to post gains yesterday, volume shrank notably thus implying relatively weaker demand. At the end of the day, no important technical signals occurred. Both the MID and RUT (page 4) remain below their prior short term uptrend lines as their bounce could be described as “minimal”. So far, the DJI (page 2), COMPQX (page 3) and DJT (page 3) remain above their uptrend lines. The trend breaks on the MID and RUT remain a concern.
- The data, however, has become a bit more disconcerting. All of the McClellan OB/OS Oscillators remain neutral (NYSE:-32.42/+32.82 NASDAQ:-33.19/-4.86). Given the setup of the rest of the data, we would expect them to become oversold over the near term. The WST Ratio and its Composite are both bearish at 76.5 and 174.8.
- It is the sentiment data that has been of some concern that is sending a more negative signal now. The pros and the “crowd” have reached a more polarized extreme. We now find the Gambill Insider Buy/Sell Ratio at a very low and bearish 5% as of 7/8. They have no interest in buying their stock at current levels. The OEX Put/Call Ratio (smart money) still shows the pros betting heavily on more weakness at 2.58. At the other end of the spectrum, the “crowd” remains overly bullish. The new Investors Intelligence Bear Bull Ratio (contrary indicator) shows bears swamped by bulls at 15.2/60.6 while the detrended Rydex Ratio shows the leveraged ETF traders still reaching for the sky at 1.5 with the Equity Put/Call Ratio (contrary indicator) seeing the crowd long calls at .54. So as a whole, the gulf between the pros and crowd has widened.
- In conclusion, the combination of the recent chart action with current sentiment suggests some near term weakness to be of some reasonable probability.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.39 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.12 versus the 10 Year Treasury yield of 2.55%.
See Attached PDF