DJT, RUT Below Uptrends And 50-DMAs

We continue to have a cautious short term outlook for the major equity indexes as the charts have suffered some technical damage as a result of yesterday’s sizable decline on heavy volume while the data is not at levels we have found to be historically coincident with correction lows. As well, the internal breadth of the markets continues to deteriorate.

• On the charts, the most notable technical damage took place on the DJT and RUT which have been showing divergent action versus the DJI and SPX over the past several weeks as noted in our comments. The DJT (page 3) closed well below its 50-DMA for the first time since the initiation of the recent rally at the mid-November lows. It also saw its second and much more notable close below its uptrend line over the same period. It is currently approaching short term support. A break of said support would be a very negative signal for the markets as a whole, in our opinion.
• The RUT (page 4) suffered as well as it also closed well below its 50-DMA and near support. The OTC, although able to hold support and its 50-DMA also closed below its uptrend line for the second time during the six-month rally.
• And while the DJI and SPX have, so far, neither violated the 50-DMA or trend, the very broad Value Line Arithmetic Average (page 4) broke below its 50 DMA continuing, in our opinion, to show more internal deterioration of market breadth.
• On the data, the McClellan 1 day OB/OS Oscillators are oversold on the NYSE (-59.48) and OTC (-76.06). So we may see a bounce. However, the 21-day levels remain neutral respectively at +2.32 and -42.8 where levels of at least -50 are typically seen before correction lows are made.
• As well, the Rydex Ratio (contrary indicator) shows the leveraged ETF traders yet unfazed by yesterday’s rout at 49.5 while insiders remain on the sidelines with a low 8% Gambill Insider Buy/Sell Ratio. The pros remain bearish as well with the OEX Put/Call Ratio (smart money) heavy in puts at 1.83.
• In conclusion, although we may see some bounce from yesterday’s selloff today, the internal breadth, lack of growth index participation and technical deterioration continue to suggest to us that risk remains fairly high for the equity markets over the near term.
• For the longer term, we remain bullish on equities as they remain undervalued with a 7.3% forward earnings yield versus the 10-Year Treasury yield of 1.70%.

• SPX: 1,545/?
• DJI: 14,418/?
• OTC: 3,215/?
• DJT: 5,878/6,180
• RUT: 905/950