Short-Term Outlook Turns Neutral

Data Moderates

Opinion

All of the indexes closed higher yesterday with positive internals on mixed volumes for the exchanges. While the indexes did advance, they closed at or near their lows of the day and well off of the intraday highs, implying strength was seen as a selling opportunity. All of the current support levels held but all of the indexes also remain below their short term downtrend lines. As well, yesterday’s action had impact on the data leaving it more neutral in nature than its prior bullish implications. As such, our near term outlook is now neutral while we remain concerned for the more intermediate term.

• On the charts, all of the indexes closed higher but at or near their lows of the day. The large gap opens proved to be the highs of the day as the indexes drifted down consistently post the open. While no important technical signals were generated, the fact that sellers dominated the session post the open implies institutions saw strength as a selling opportunity, thus giving the day a darker tone, in our opinion. As well, all of the stochastic levels have nullified their prior bullish crossover signals. So with the downtrends and support resistance levels intact, we now see the charts as confined to their current trading ranges until a violation occurs in either direction.

• The data has turned more neutral as well. The only McClellan OB/OS Oscillator that remains oversold is the NASDAQ 1 day at -59.57. The rest are now neutral. The fact that the NASDAQ 1 day oversold condition was cut almost in half with such minor progress also gets our attention. The Total Put/Call Ratio (contrary indicator) still shows the crowd very nervous and very long puts at 1.16. Unfortunately, the pros as measured by the OEX Put/Call Ratio (smart money) are up to their eyeballs in puts as well at a very bearish 2.91. As such, they cancel each other out while the Equity Put/Call Ratio is a neutral .69. So we now see the prior bullish data implications as being largely neutralized.

• In conclusion, we now see the near term prospects for the indexes to be neutral given the status of the charts and data readings. The intermediate term remains a concern due to high levels of leverage being employed, poor market breadth and relatively high valuation as per a 10 year lookback.

• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.15% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.21 versus the 10-Year Treasury yield of 2.30%.
• S&P 500: 2,041/2,084
• DJI: 17,400/17,788
• NASDAQ Composite; 4,887/5,020
• Dow Jones Transportation: 7,987/8,306
• S&P Midcap 400: 1,472/1,512
• Russell 2000: 1,225/1,249

Short-Term Outlook Turns Neutral

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Written By: Guy S. Ortmann, CMT