COMPQX Closes Above Long Term Uptrend Line

Most Short Term Trends Remain Neutral

Opinion: All of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ. However, trading volumes were below the prior session’s selloff. No resistance levels were violated on the charts, leaving them mostly in their near term neutral trends. The data is mixed and yielding no dominant directional probabilities. As such the charts and data imply a neutral near term forecast. However, we reiterate our strong concerns that a high level of risk remains present given extended valuation, high levels of margin debt and investment advisor complacency. Although yesterday recovered Tuesday’s damage, albeit on lighter volume, the three factors stated above suggest to us that further similar downdrafts have a reasonably high probability of occurring. As such, we continue to be of the opinion that risk/reward is currently poor and remain “negative” in our view of market potential.

• On the charts, all of the indexes closed higher yesterday with positive internals on lower than prior volume. However, no resistance levels were violated leaving all of the near term trends neutral with the exception of the DJT (page 3) which is positive. The COMPQX (page 3) managed to close back above its long term downtrend line violated at the close of Tuesday’s trading.

• The data is mixed with most of the McClellan OB/OS Oscillators neutral with the exception of the NYSE 21 day that is mildly overbought (All Exchange:+24.66/+39.27 NYSE:+21.9/+51.41 NASDAQ:+28.57/+29.29). The Equity Put/Call Ratio is a neutral 0.68 as is the Open Insider Buy/Sell Ratio at 45.2. The OEX and Total Put/Call Ratios are on bullish signals at 0.95 and 0.6 respectively while the Rydex Ratio (contrary indicator) remains very bearish at 72.8 as leveraged ETF traders remain very leveraged long.

• In conclusion, while the charts and data continue to suggest a rather neutral outlook, we remain of the opinion that a high level of risk is present versus potential reward as the forward valuation of the SPX at an 18.2 multiple combined with heavy margin exposure (up 20.5% y/y) and the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 19.4/51.0 implying complacency on their part combine to suggest appreciable downside risk is present should an event occur that could cause a shift in sentiment. Sharp downdrafts as the one experienced Tuesday are not uncommon when those conditions are present.

• 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: 2,420/NA

DJI: 21,042/NA

COMPQX: 6,121/6,304

DJT: 9,160/9,554

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MID: 1,715/NA

RTY: 1,392/1,427

VALUA: 5,447/5,571

Morning Technical Note

Written By: Guy S. Ortmann, CMT