Charts Positive But Data Remains Cautionary

Charts Positive But Data Remains Cautionary

The indexes closed mixed Thursday with mixed internals on the NYSE and positive internals on the NASDAQ. Both saw overall trading volumes decline from the previous session. The charts saw the SPX and DJI close above resistance as some other indexes declined. Yet while the charts remain positive, some of the data still suggests an increased potential for some retracement of the recent gains while the valuation metrics continue to show a compression of current versus fair valuation. As such, we are maintaining our near term “neutral” outlook for the major equity indexes at this time.

On the charts, the indexes closed mixed yesterday with most advancing while the DJT (page 4), MID (page 4) and VALUA (page 5) declined.

  • The SPX (page 2) and DJI (page 2) closed above near term resistance as the NDX (page 3) and VALUA closed at resistance.
  • The NYSE saw positive breadth but negative up/down volume as the NASDAQ’s internals were positive.
  • All of the near term trends remain positive as are the cumulative advance/decline lines.
  • High “volume at price” (VAP) levels remain supportive.
  • However, all of the stochastic levels are well into overbought territory, implying potential risk is present.
  • As all will know, downside moves in the markets of late have occurred with wide price gaps, giving little or no time to respond effectively. This also adds to our neutral outlook.

The data remains mixed.

  • All of the 1-day McClellan OB/OS Oscillators remain overbought (All Exchange:+81.58 NYSE:+73.23 NASDAQ:+94.21). Like the stochastic readings, they imply an increase in retracement potential.
  • The detrended Rydex Ratio (contrary indicator) is neutral at +0.28 as is the % of SPX stocks trading above their 50 DMAs at 67.1.
  • Tuesday’s AAII Bear/Bull Ratio (contrary indicators) remained bullish at 40.0/26.67. The Investor’s Intelligence Bear/Bull Ratio (contrary indicator) shifted from bearish to neutral at 18.7/44.9 .
  • The Open Insider Buy/Sell Ratio remains neutral at 42.4.
  • The appearance of valuation continuing to look appealing, assuming current estimates hold, continues to compress with the 12-month forward consensus earnings estimate from Bloomberg for the SPX dipping to $171.54, leaving the forward p/e at a 17.5 multiple while the “rule of twenty” finds fair value at 18.2. We would note said earnings estimates have been declining over the past week from $172.25 as the markets have moved higher.
  • The 10-Year Treasury yield rose to 1.79%.
  • The earnings yield stands at 5.7%.

In conclusion, while not riding the trend may be heretical from a chart standpoint, the increase in downside risk has elevated via the stochastic readings, OB/OS levels and compression in the valuation gap. As such, we fell it appropriate to maintain our near term “neutral” outlook for the major equity indexes.

SPX: 2,965/3,022
DJI: 26,930/27,343
Nasdaq: 8,040/8,230
NDX: 7,743/7,935
DJT: 10,060/10,547
MID: 1,914/1,965
Russell: 1,513/1,581
VALUA: 6,205/6,322

Charts Positive But Data Remains Cautionary

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