McClellan OB/OS Oscillators Overbought

Short Term Uptrends Intact

Opinion: The bulk of the indexes closed higher yesterday with the one exception of the DJT. Some new closing highs were again achieved as breadth and up/down volumes were positive on the NYSE and NASDAQ as volumes declined on both exchanges from the prior session. While the charts remain positive, the data is starting to suggest more strongly that the markets may now see a pause or some retracement of the current rally. However, and in spite of our valuation concerns, we remain of the opinion that the near term uptrends of the charts should be respected until proven otherwise.

• On the charts, the only index to close lower yesterday was the DJT (page 3). The rest posted gains with the SPX (page 2) and DJI (Page 2) making new closing highs. The RTY (page 4) closed above its short term resistance levels as well. As such, all of the near term uptrends for the indexes remain intact and should continue to be respected, in our opinion. Yet we would also note the DJI is now at its “return line” that has been a point preceding retracements since April of this year. As well, all of the stochastic levels remain overbought but have yet to flash bearish crossover signals.

• The data is starting to turn a bit more cautionary as all of the McClellan OB/OS Oscillators are now in overbought territory (All Exchange:+58.03/+80.07 NYSE:+55.85/+92.23 NASDAQ:+63.77/+72.3) while the OEX Put/Call Ratio at 1.46 finds the pros weighted in puts and expecting some degree of weakness near term. Some psychology data has moderated with the new AAII Bear/Bull Ratio (contrary indicator) at a neutral 32.0/31.67 and the Investors Intelligence Bear/Bull Ratio (contrary indicator) a mildly bearish 20.0/47.1. The Open Insider Buy/Sell Ratio is a neutral 40.0.

• In conclusion, all of the near term trends remain positive on the charts as do the cumulative advance/decline lines, suggesting the trends should continue to be respected. However, the OB/OS suggest a pause/retracement of the rally may be the more probable near term scenario. Extended valuation remains a concern.

• Forward 12 month earnings estimates for the SPX from Bloomberg of $137.37 leave a 5.56 forward earnings yield on a 18.2 forward multiple, over a decade high.

SPX: 2,460/NA

DJI: 21,840/NA

NASDAQ: 6,300/NA

DJT: 9,234/9,550

MID: 1,713/1,763

RTY: 1,414/1,452

VALUA: 5,519/5,650

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Written By: Guy S. Ortmann, CMT