Indexes And Internals Diverge
Guy S. Ortmann, CMT | Jul 21, 2014 09:26AM ET
Opinion: Friday’s bounce came as implied by the deeply oversold McClellan OB/OS Oscillators. However, market internals continue to send signs of caution as breadth continues to narrow while sentiment remains a concern as insiders sell to an overly enthusiastic crowd. Our interpretation of current conditions still suggests to us money is chasing fewer stocks as the foundation of breadth is weakening. We remain skeptical of the bounce and cautious for the intermediate term.
- On the charts, the indexes rallied Friday from deeply oversold OB/OS levels with positive breadth. Volumes increased on the NYSE but declined on the NASDAQ. No resistance levels were violated but the MID (page 4) did manage to close back above its 50 DMA yet remains in its current short term downtrend. The RUT (page 4) remains below its 50 DMA while also staying in its downtrend.
- What continues to be of concern for us is the fact that the All-Exchange, NYSE and NASDAQ Advance/Declines have all now put in a lower low and a lower high while the indexes advance. This continued deterioration, in our opinion, suggests more money is chasing fewer (large cap) stocks. Historically, the more popular indexes have usually succumbed as the large caps have typically been the last to roll over.
- On the data, the deeply oversold McClellan OB/OS Oscillators from last Thursday have all turned neutral (NYSE:-38.34/+18.01 NASDAQ:-44.04/-33.76). The WST Ratio and its Composite are back on bearish signals at 87.7 and 181.1 while insiders continue to sell into the market as noted by the low and bearish Gambill Insider Buy/Sell Ratio at 6.6. Yet the leveraged ETF traders measured by the detrended Rydex Ratio (contrary indicator) remain heavy in the leveraged long funds. And although the OEX 1 day Put/Call Ratio (smart money) is a neutral 1.06, the 15 DMA still shows the pros as very nervous at a very bearish 2.24.
- In conclusion, the shrinking internal breadth and negative sentiment data keep speaking words of caution, in our opinion.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.38 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.14 versus the 10 Year Treasury yield of 2.48%.
- SPX: 1,950/???
- DJI: 16,804/???
- NASDAQ:4,342/4,447
- DJT:8,149/???
- MID:1,391/1420
- RUT:1,132/1,169
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