This Top-Heavy Market Has Poor Breadth

 | Mar 10, 2017 | 9:43 AM EST
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Most of the indexes closed lower yesterday, with negative internals on the NYSE while the Nasdaq had negative breadth but positive up/down volumes. The Dow Jones Transports broke another support level, while the current short-term trends remain a mix of neutral and negative. The data is mixed, but is suggestive of a short-term bounce. We are of the opinion that this bounce is likely occurring within a weakening market structure, so we are maintaining our near term "neutral/negative" outlook for the major equity indexes. 

On the charts, the only indexes closing higher yesterday were the S&P 500 and Dow Jones Industrials. And those gains were seen within a day of negative breadth and up/down volumes on the NYSE. It is suggestive, in our opinion, of a continuation of deteriorating of market breadth. 

The Dow Jones Transports closed below another support level, and the S&P Midcap 400 Index and Value Line Arithmetic Index tested support. The short-term trends for the various indexes show the DJT and the Russell 2000 Index as negative, while the rest are neutral. In addition, the advance/decline line for the VALUA joined the Nasdaq A/D in closing below its 50-day moving average -- also a signal of deteriorating market breadth.

The data, on the other hand, is suggesting the potential for a bounce. All of the 1-day McClellan OB/OS Oscillators are oversold, with the NYSE extremely so (All Exchange:-98.69/-6.08 NYSE:-133.02/-8.48 Nasdaq:-80.26/-8.3). The Total and Equity Put/Call Ratios (contrary indicators) indicate that the crowd is nervous -- and heavy in puts -- at 1.12 and 0.72, respectively. This is being somewhat counterbalanced by the OEX Put/Call Ratio, which shows the pros remain very heavily weighted in puts -- at 2.07 -- as they expect further weakness. The Gambill Insider Buy/Sell Ratio remains a neutral 10.8.

In conclusion, the 1-day McClellan numbers are at levels usually found just prior to a bounce from a period of prior weakness. The futures this morning seem to confirm. But any bounce is happening within the context of a weaker equity market structure. Breadth has deteriorated notably, leaving only the large-cap indexes, with broad ETF ownership, in deceivingly decent shape. That narrowing of breadth also implies a top-heavy market. Valuation of the SPX based on forward 12-month IBES earnings estimates remains near a decade high, while investment advisors are highly complacent, with a 17.3/57.7 Investors Intelligence Bear/Bull Ratio (contrary indicator). As such, we still see current risk/reward as poor.

Forward 12-month earnings estimates for the SPX from IBES of $133.18 leave a 5.6% forward earnings yield on a 17.8x forward multiple.


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