Can Indexes Handle The Shock?

Important Short Term Supports May Be Tested

Opinion: The bulk of the indexes closed lower yesterday with the exception of the DJI. Internals were negative on the NYSE and NASDAQ as volumes rose from the prior session on the NYSE but declined on the NASDAQ. The data is largely neutral. However, all of this may be of little consequence given the news of President Trump being investigated for possible obstruction of justice. Futures are quite weak as this is being written. In our opinion, the index ETFs (QQQ and SPY (NYSE:SPY)) may be the most important barometers to watch. Should they close below Monday’s intraday lows, they would, in our opinion, imply further weakness. Given our concerns stated repeatedly over the past few weeks regarding the lack of “shock absorbers” due to valuation, advisor complacency and high margin debt, the potential for such a break does exist. We remain near term “negative” in our outlook.

• On the charts, all of the indexes closed lower yesterday with the exception of the DJI (page 2) that made a new marginal closing high. No support levels were violated but the RTY (page 4) did close below its short term uptrend line. As of the close, no important sell signals were generated. That may change today should last night’s news create a rush for the exits.

• The data is almost entirely neutral including the McClellan OB/OS Oscillators (All Exchange:+13.9/+30.64 NYSE:+19.9/+48.05 NASDAQ:+7.91/+16.04). The Total and Equity Put/Call Ratios are also neutral at 0.84 and 0.67 respectively as is the Open Insider Buy/Sell Ratio at 37.1. The OEX Put/Call Ratio is the only bullish signal as the pros remain long calls at 0.85.

• However, all of the information stated above may be of little import today. Last night’s news of the President coming under investigation is putting significant pressure in the futures the morning. The major indexes ETFs (QQQ and SPY) are testing Monday’s intraday lows. The SPY chart (page 9) suggests a close below those levels could accelerate the downside. As stated yesterday, the forward p/e for the SPX is back up to an 18.2 forward multiple, the highest valuation we’ve seen by that metric in over a decade. Investment advisors as measured by the Investors Intelligence Bear/Bull Ratio (contrary indicator) are near peak levels of market optimism at 19.4/63.6 suggesting an almost euphoric attitude. Finally, the use of margin to achieve performance has expanded by 20.5% on a y/y basis. In combination, they suggest real downside risk is present”. Today may be the day that tests the markets ability, or not, to handle the shock.

• Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.2 forward multiple, near a decade high.

SPX: 2,400/NA

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

DJI: 21,042/NA

COMPQX; 6,121/6,304

DJT: 9,160/9,487

MID: 1,715/NA

RTY: 1,391/NA

VALUA: 5,473/NA

Morning Technical Note

Written By: Guy S. Ortmann, CMT