More Bounce Left?
Guy S. Ortmann, CMT | Dec 18, 2014 10:11AM ET
Yesterday’s data suggesting near term bounce potential for the equity indexes came to fruition as all of the indexes advanced with positive internals and heavy trading volumes. Some positive technical events took place as well. However, with one exception, all of the near term downtrends remain intact while current futures suggest some indexes will open this morning at important resistance levels. So from a chart perspective, we are not out of the woods yet in spite of some further bounce potential. Sentiment has been unfazed and remains cautionary while declining SPX estimates leave valuations at peak decade levels. As such, we remain concerned regarding the intermediate term.
- On the charts, all of the indexes closed strongly higher on large volume and positive internals. Positive technical events came in the form of all of the indexes closing at their highs of the day and back above their 50 DMAs. The RUT (page 4) actually closed above resistance and its short term downtrend line.
- However, that cannot be said for any of the other indexes. They all remain below resistance and their respective downtrend lines in spite of the sizable gains. As mentioned above, futures suggest an up opening but at levels essentially equal to resistance. If those levels cannot be violated by the close today, the strong rally will have had no impact on the current downtrends.
- On the data, the McClellan OB/OS Oscillators are all neutral (NYSE:-45.41/-11.31 NASDAQ:-17.77/-8.56) suggesting some further bounce potential as no overbought conditions exist.
- Yet the issues that have been of concern to us have yet to be resolved. Regarding sentiment, the “crowd” never saw a decline in its rabid bullish opinion as a result of recent declines as the new Investors Intelligence Bear/Bull Ratio (contrary indicator) shows advisors still remain overly optimistic at 14.9/49.5. The Rydex Ratio (contrary indicator) also shows the leveraged ETF traders remain near peak levels of leveraged long at 63.4. This is in the face of 12 month forward SPX estimates continuing to decline to $127.05 and near peak decade valuation of 15.8X. As such, we believe sentiment and valuation remain a concern.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.31% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.05 versus the U.S. 10-Year yield of 2.15%.
- S&P 500: 1,969/2,031
- Dow 30: 17,002/17,612
- NASDAQ: 4,489/4,688
- Dow Jones Transportation: 8,631/9,110
- S&P Midcap 400: 1,387/1,424
- Russell 2000: 1,140/1,179
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