NYSE: Indexes Advance With Positive Internals

Charts See Improvements

Opinion: All of the indexes closed higher yesterday with broadly positive internals as volumes rose on the NYSE and NASDAQ from the prior session. Multiple positive technical events occurred on the charts while the data remains fairly benign with only a few yellow flags. For the past several weeks, we have been stressing our concerns regarding what we view as high levels of market risk given valuation, margin debt levels and investment advisor complacency. Nonetheless, the indexes have marched higher. Yet while our concerns remain, the charts and data suggest we may be ahead of the curve. Unless and until there is a shift in the trends to the negative, the current mix of neutral and positive trends are likely to persist.

• On the charts, all of the indexes closed higher yesterday with broadly positive internals as volumes rose from the prior session. The SPX (page 2), DJI (page 2), COMPQX (page 3) and VALUA (page 5) all closed above their near term resistance levels. Both the DJI and DJT (page 3) made new closing highs while the SPX and COMPQX closed above their short term downtrend lines. We now find the DJI and DJT in short term uptrend while the rest are neutral. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are now positive and above their 50 DMAs as well. As such, the charts are clear of any near term sell signals at this stage. The trends should be respected until proven otherwise.

• The data remains largely neutral including all of the McClellan OB/OS Oscillators (All Exchange:22.7/+24.67 NYSE:+22.77/+37.79 NASDAQ:+22.66/+13.3), the Equity and Total Put/Call Ratios (0.6/0.71) and Open Insider Buy/Sell Ratio (46.4). A caution signal is being given by the OEX Put/Call Ratio as the pros loaded up on puts to a very bearish 2.0. Yet we would note the prescience of this indicator has diminished notably over the past several months.

• In conclusion, the chart trends appear to rule in spite of our concerns regarding the following. The new Investors Intelligence Bear/Bull Ratio still shows investment advisors quite complacent at 18.8/52.5 while the use of margin is up 19.7% y/y. Forward valuation of the SPX is at an 18.2 multiple, just shy of a 15 year market peak, while the U.S. stock market total valuation is now 1.3 times U.S. GDP (only seen in late 1999 and early 2007).

• Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.1 forward multiple, near a decade high.

SPX: 2,404/2,450

DJI: 21,305/21,505

COMPQX; 6,070/6,308

DJT: 9,439/NA

MID: 1,730/1,758

RTY: 1,392/1,420

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VALUA: 5,447/5,581

Morning Technical Note

Written By: Guy S. Ortmann, CMT