Some New Highs As Breadth Deteriorates

McClellan 1-Day OB/OS Oscillators Oversold

The major equity indexes closed mostly lower Thursday with broadly negative internals on the NYSE and NASDAQ as trading volumes rose from the prior session. While three of the index charts posted new closing highs, they did so as poor market breadth deteriorated further that implies a weakening underlying structure. As such, the index trends remain a mix of bullish, neutral and bearish projections. Meanwhile, the data is mixed with the 1-day McClellan OB/OS Oscillators in oversold territory while the leveraged ETF traders (contrary indicator) remain leveraged long. As such, in our opinion, there were no shifts in the weight of the evidence to warrant a change in our “neutral” near-term macro-outlook for equities.

On the charts, the major equity indexes closed mostly lower Thursday with negative internals on the NYSE and NASDAQ as both saw volumes rise from the prior session.

• On the positive side, the SPX (page 2), COMPQX (paghe3 3) and NDX (page 3) posted new closing highs as the rest declined. In our opinion, said new highs are somewhat suspect as the foundation upon which they are built (breadth) continued to deteriorate.
• Regarding trends, The COMPQX, NDX, and VALUA (page 5) remain in near-term uptrends while the RTY (page 5) is bearish and the rest neutral.
• Looking closer at market breadth, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ weakened further and remain negative as the NASDAQ A/D closed below its 50 DMA.
• No stochastic signals were generated.

The data finds the McClellan 1-Day OB/OS falling into oversold territory (All Exchange: -60.92 NYSE: -62.78 NASDAQ: -59.34). While oversold, they are capable of becoming more so.

• The detrended Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders lifted to 1.26 and remains inside bearish territory as they continue their extended leveraged long exposure.
• The Open Insider Buy/Sell Ratio (page 9) was lifted as well to 35.3 but remains neutral.
• This week’s contrarian AAII Bear/Bull Ratio (0.65) remained neutral as does the Investors Intelligence Bear/Bull Ratio (22.3/56.5) (contrary indicator page 9).
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg dropping to $213.74 for the SPX. As such, the SPX forward multiple is 22.0 with the “rule of 20” finding fair value at approximately 18.4.
• The SPX forward earnings yield is 4.54%.
• The 10-year Treasury yield closed at 1.59%. We view resistance at 1.68% and support at 1.57%.

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In conclusion, the details of the charts and data discussed above suggest we keep our near-term macro-outlook for equities at “neutral”. Market selectivity persists.

SPX: 4,620/4,717A

DJI: 35,904/36,203

COMPQX: 15,598/16,020

NDX: 16,130/16,380

DJT: 16,000/16,915

MID: 2,872/2,907

RTY: 2,360/2,400

VALUA: 9,937/10,151

Written By: Guy S. Ortmann, CMT