Time For A Pause

There were multiple chart improvements as of Friday’s close while the McClellan OB/OS Oscillators remain in neutral territory. However, the drop in trading volume during the last session combined with some chart resistance levels and sentiment data suggest to us the near term outlook is slightly skewed to the higher probability that the major indexes are likely to see some pause in strength over the near term.

• On the charts, several technical improvements were achieved during the last session. The DJI (page 2) managed to join the rest of the indexes by closing above its 50-DMA. The SPX (page 2) closed above its short-term resistance level that is now adjusted to 1,709 by our work while both the RUT and MID (page 4) closed above resistance as well with no overhanging supply on the charts.
• Both the NASDAQ and DJT (page 3) rallied up to but were unable to exceed their respective near term resistance hurdles. The advances were positive but the light trading volume does detract from the otherwise healthy action. As such, we suspect indexes at resistance such as the DJT and NASDAQ may take a step back before making another assault.
• On the data, the McClellan OB/OS Oscillators are neutral across the board for the NYSE (+17.33/+23.57) and NASDAQ (+13.97/+19.83) giving no strong directive implications. The bulk of the remaining data is neutral as well with the exception of the sentiment numbers that continue to have us looking over our shoulders. The Gambill Insider Buy/Sell Ratio remains at a low and bearish 9% as of 10/10. Our concern is based on the fact that throughout the recent correction, we never saw the typical spike up in insider buying usually seen near the end of a correction phase. Their reluctance to step up to the plate after a 1,000 point peak to trough slide in the DJI suggests to us something beyond government paralysis may be holding them back that the markets have yet to decipher. Meanwhile, the Rydex Ratio (contrary indicator) has the leveraged ETF traders all in at a detrended 1.13. An eager crowd with cautious insiders is a dynamic we find difficult to ignore.
• For the longer term, we remain bullish on equities as they remain undervalued with a 7.1% forward earnings yield versus the 10-Year Treasury yield of 2.68%.
• SPX: 1,640/1,709
• DJI: 14,775/15,347
• NASDAQ: 3,676/3,774
• DJT: 6,385/6,650
• MID: 1,216/?
• RUT: 1,039/?

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Written By: Guy S. Ortmann, CMT