Some Chart Improvements Achieved

Stochastics Overbought On Large Cap Indexes

Opinion: All of the indexes closed higher yesterday with improvements on some of the charts. Internals were positive on the NYSE and NASDAQ as volumes rose on the NYSE and declined on the NASDAQ. The data remains largely neutral. However, in spite of the improvements on the charts, we are inclined to maintain our near term “negative” outlook for the major equity indexes as advisors are showing a high level of complacency while valuation remains near historically high levels. We are having a hard time shaking the sense that we are in a period of “greater fool” territory.

• On the charts, all of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ. Yet we would note that while the stats were positive, the up/down volumes were narrowly so as was the NASDAQ A/D. The SPX (page 2) made a new closing high while both the COPMPQX (page 3) and MID (page 4) closed above near term resistance. The MID also closed above its short term downtrend line as did the DJT (page 3). So now the SPX and COMPQX are in uptrends, the DJI (page 2), DJT and MID are neutral while the VALUA (page 5) and RTY (page 4) are still in downtrends. We would also note the bounce has pushed the SPX, DJI and COMPQX into overbought territory on their stochastic levels.

• The data is largely neural including all of the McClellan OB/OS Oscillators (All Exchange:+21.26/+8.29 NYSE:+27.66/+23.97 NASDAQ:+15.86/-5.71). The Equity Put/Call Ratio (0.62) and Open Insider Bear/Bull Ratio (54.4) are neutral as well. The Total Put/Call Ratio is in bullish territory at 0.93 while the OEX Put/Call Ratio shows the pros flipping from being long puts to a mildly bullish 0.99.

• In conclusion, in spite of the improvements noted above, the high level of investment advisor complacency as described by the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 17.1/58.1 with a forward SPX p/e based on forward 12 month IBES earnings estimates near an historic high of 17.9 create a nagging sense that the markets have entered a period where the “greater fool” theory has come into play. We are keeping our near tern “negative” outlook for the major equity indexes intact.

• Forward 12 month earnings estimates for the SPX from IBES of $134.56 leave a 5.63 forward earnings yield on a 17.9 forward multiple, near a decade high.

SPX: 2,354/NA

DJI: 20,553/21,017

NASDAQ ; 5,908/6,169

DJT: 8,784/9,091

MID: 1,692/1,738

Russell: 1,350/1,376

VALUA: 5,368/5,466

Scarsdale Equities

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Written By: Guy S. Ortmann, CMT