The Charts and Data Are Getting Darker

 | Mar 08, 2017 | 9:48 AM EST
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All of the indexes closed lower yesterday -- near their intraday lows with negative internals, as volumes dipped on the NYSE and rose slightly on the Nasdaq. Near-term support levels were violated on three of the indexes, as advance/decline lines continued to deteriorate. The data remains mixed, but all of the 1-day McClellan OB/OS Oscillators are now oversold. Nonetheless, the breaks in some of the charts combined with extended valuation and investment advisor complacency suggest an unappealing near-term risk/reward scenario, and we've shifted our near-term outlook for the major equity indexes from "neutral" to "neutral/negative."

On the charts, the Dow Jones Transports, S&P 400 Mid-Cap and Russell 2000 indexes all closed below their respective near-term support levels, while the RTY closed below its 50-day moving average (DMA), as well.

The S&P 500 index closed below its short-term uptrend line. The advance-decline lines for the All Exchange, NYSE and Nasdaq are in short-term downtrends, and the Nasdaq A/D closed below its 50 DMA. This presents evidence of market breadth continuing to weaken.

The data scales are somewhat evenly balanced. On the positive side, all of the McClellan 1-day OB/OS Oscillators are oversold (All Exchange:-68.81/+11.4; NYSE:-89.37/+7.93; Nasdaq:-72.83/-10.77) suggesting some pause or bounce from the recent weakness. On the negative side, the Equity Put/Call Ratio (contrary indicator) finds the crowd eager to buy any dips, as they are heavy in calls at 0.54. The pros, as measured by the OEX Put/Call Ratio, expect further weakness -- and are loaded in puts at 2.34. The Gambill Insider Buy/Sell Ratio remains neutral at 10.2.

Given the weakening of technical chart pictures and deterioration in breadth, we are inclined to change our near-term outlook for the major equity indexes to "neutral/negative" from our prior "neutral" view. In addition, given forward valuation of the SPX at a historically extended multiple and overly bullish investment advisor sentiment -- with the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.5/63.1 -- this presents a poor risk/reward scenario right now. We have also seen a surge in margin exposure from 6% to 15% on a year-on-year basis.

Forward 12-month earnings estimates for the SPX from IBES of $132.19 leave a 5.58% forward earnings yield on a 17.9x forward multiple, over a decade high.

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