Potential Change In Leadership

All of the indexes closed higher yesterday with positive internals as volumes rose on the NYSE and declined on the NASDAQ. There were mixed technical signals coming from the index charts that we believe suggest a potential shift in market leadership from that which has been the case over the past several months as discussed below. The data has moderated and is now a mixed bag of positive and negative signals. As such, the action in the charts combined with the data continues to imply a neutral outlook over the near term. The intermediate term outlook may be improving but has yet to move us from our current cautionary view.

• On the charts all of the indexes closed higher on the day. However, there was a combination of positive and negative signals suggesting a possible shift in leadership. The SPX (page 2) closed below its short term uptrend line and is on a bearish stochastic crossover signal. The COMPQX (page 3) saw the same action. These two indexes have been the leaders over the past several months, largely due to a handful of components carrying the weight. As those components now appear to be rolling over, their impact is now reversing its prior influence.

• In contrast, the DJT (page 3) closed above resistance and its intermediate downtrend line that had been in effect since the beginning of December. As we still view it as the leading index, it sends a positive signal for the markets as a whole. The VALUA (page 5) which we regard as a more honest view of the equity markets due to its breadth and lack of market weighting tested resistance and remains above its short term uptrend line. Both are seeing a rise in their relative strength to the SPX as the COMPQX relative strength is waning. The net result, in our opinion, is the market’s prior character of the past several months may be in the process of reversing.

• The data is now mixed. The 1 day McClellan OB/OS Oscillators find the NYSE and All Exchange in overbought territory (+67.58/+51.5). Yet their 21 day levels remain oversold (-57.17/-66.76). And the OEX Put/Call Ratio (smart money) at 2.64 finds the pros heavy in puts and expecting weakness while the new AAII Bear/Bull Ratio (contrary indicator) still finds the crowd quite scared at 34.72/27.55, a bullish reading.

• In conclusion, we see some reasons to expect some possible broadening of breadth and change in market leadership while remaining neutral in our near-term outlook for the markets in general.

• Forward 12 month earnings estimates for the SPX from IBES is $123.13 leaving a 6.43% forward earnings yield with a 15.6 forward multiple.
• SPX: 1,875/1,949
• DJI: 15,975/16,592
• NASDAQ; 4,418/4,644
• DJT: 6,580/7,022
• MID: 1,230/1,315
• Russell: 982/1,052
• VALUA: 3,888/4,070

Potential Change In Leadership

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Written By: Guy S. Ortmann, CMT