Another Bounce Attempt?

Yesterday saw another failed rally attempt as all of the indexes closed lower with negative internals and heavy trading volume. The action suggests it was another session of institutional distribution. More negative chart signals were triggered as well. However, while we remain concerned for the intermediate term, some of the data is again implying a near term bounce for the indexes. Yet we would stress as this stage, in our opinion, said bounce would be one within a downtrend that has yet to be reversed.

• On the charts, after an attempted rally, all of the indexes closed notably lower with negative internals and heavy trading volume. All of the indexes closed at their lows of the day as no buyers arrived to save the day. More negative technical signals were given as the DJI (page 2), COMPQX (page 3) and DJT (page 3) all closed below their respective short term support levels. The DJT is now the only index left above its 50 DMA while both the MID and RUT have fallen below their 200 DMAs. As such, the short term downtrends remain intact.

• Looking at the data, we believe it is suggestive of another rally attempt. The NYSE and NASDAQ 1 day McClellan OB/OS Oscillators are oversold with the NYSE extremely so (NYSE:-118.67 NASDAQ:-73.43). Their 21 day levels remain neutral (NYSE:-37.64 NASDAQ:-35.97). The WST Ratio and its Composite are both bullish at 12.9 and 69.2 while remaining on a “bull alert” signal. The Total and Equity Put/Call Ratios (contrary indicators) now show the “crowd” long puts at .98 and .74 with the OEX Put/Call Ratio (smart money) a mildly bullish 1.0. As such, they imply some possible short term relief.

• However, the Rydex Ratio (contrary indicator) still shows the leveraged ETF traders heavily leveraged long at 63.3. We would need to see a change of heart from these traders to become more constructive. The next 2 days will offer some new sentiment data that may shed further light.

• Finally, forward 12 month SPX estimates from First Call have declined again, this time from $127.63 to $127.05 leaving the forward p/e at 15.5X and at the upper end of its decade range.

• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.44% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.05 versus the U.S. 10-Year yield of 2.07%.
• S&P 500: 1,969/2,031
• Dow 30: 17,002/17,612
• NASDAQ: 4,489/4,688
• Dow Jones Transportation: 8,631/9,110
• S&P Midcap 400: 1,387/1,424
• Russell 2000: 1,119/1,156

Another Bounce Attempt?

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Written By: Guy S. Ortmann, CMT