The Data Says This Market Is Oversold

 | Mar 15, 2017 | 9:54 AM EDT
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The indexes closed lower yesterday, with negative internals on both the NYSE and Nasdaq. Volumes rose on the NYSE and declined on the Nasdaq vs. the prior session. The charts showed a couple of negative technical events, but support levels held for the most part. The data suggests some potential for some short-term relief, but we are keeping our near-term outlook for the major equity indexes at "neutral/negative" on continuing deterioration of market breadth and the historically high forward valuation of the SPX.

On the charts, the S&P 500, Dow Jones Industrials and S&P Midcap 400 Index all tested support successfully, but the Dow Jones Transports closed below another support level while the Value Line Arithmetic Index closed below its 50-day moving average (DMA). 

The short-term trends are neutral for most of the indexes -- with the exception of the DJT, which is in a downtrend. What remains a concern for us is that the advance/decline lines for the All Exchange, NYSE and Nasdaq are all negative and below their 50 DMAs. The implication is that the large-cap indexes are masking the weakening of the underlying breadth foundation for the markets.

We believe the data is suggesting some potential for near-term relief, as all of the 1-day McClellan OB/OS Oscillators are oversold (All Exchange:-61.19; NYSE:-84.68; Nasdaq:-53.14). The 21-day levels are neutral. The put/call ratios are also positive, as the Total and Equity Put/Call Ratios (contrary indicators) show the crowd nervous -- and long puts at 0.93 and 0.73, respectively -- while the OEX Put/Call Ratio shows the pros have flipped from being very long puts yesterday to very long calls this morning -- at 0.42 -- as they now expect some strength on the horizon.

In conclusion, despite that short-term relief showing in the data, the fact that internal breadth has continued to deteriorate under the camouflage of the large-cap indexes, while forward valuation of the SPX remains near its decade high, suggests to us that there is a reasonably high level of risk vs. potential reward right now. So we are maintaining our near-term "neutral/negative" stance.

Forward 12-month earnings estimates for the SPX from IBES of $133.18 leave a 5.63% forward earnings yield on a 17.8x forward multiple, over a decade high.

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