Brighter Charts Lift Negative Outlook to 'Neutral/Negative'

 | Apr 21, 2017 | 10:00 AM EDT
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All of the indexes closed higher yesterday, with positive internals on the NYSE and Nasdaq. Volumes were higher on the NYSE vs. the prior session, while Nasdaq volumes were flat.

Several improvements were registered on the charts in terms of trend and daily moving averages. The data remain largely neutral.

So, in spite of our concerns regarding forward valuation, advisor complacency and high margin debt, the charts are the ultimate barometer. Due to their improvements, they are causing a shift in our short-term outlook for the major equity indexes from "negative" to "neutral/negative".

All of the indexes closed higher yesterday, with broadly positive internals in response to a resurrection of healthcare discussions in Congress. Several chart improvements were achieved in the following manner.

The Dow Jones Transports closed above near-term resistance and its short-term downtrend line. It continues to trade below its 50-day moving average.

The S&P Midcap 400 Index, the Russell 2000 and the Value Line Arithmetic Index closed above their short-term downtrend lines and 50-day moving averages.

As such, we now find five of the seven indexes in neutral sideways patters. The two outliers are the S&P 500 and Dow Jones Industrials, which remain in their short term downtrends.

As well, the cumulative advance/decline lines for the All Exchange and NYSE are now positive and above their 50-day moving averages, while the NASDAQ A/D is now neutral.

We note, however, that while the SPX is fairly close to its all-time high, only 45.5% of its components are trading above their 50 day moving averages.

The data continue to send a rather neutral message. All of the McClellan OB/OS Oscillators are neutral, with the exception of the NYSE 21 day, now in overbought territory (All Exchange:+13.6/+29.0 NYSE:+23.91/+67.56 NASDAQ:+34.52/+21.47).

The Equity and OEX Put/Call Ratios are neutral at 0.68 and 1.28 as is the Oppenheimer Buy/Sell ratio showing insider activity fairly evenly balanced at 57.9. The Total Put/Call Ratio (contrary indicator) finds the crowd a bit more nervous and buying some puts at 0.90.

Extended forward valuation of the SPX, investment advisors showing a high degree of complacency and extensive use of margin debt remain disconcerting. However, we are bound by our discipline to honor the chart action that has now turned "neutral/negative" from its former "negative" implications.

Forward 12-month earnings estimates for the SPX from IBES of $134.29 leave a 5.7% forward earnings yield on a 17.5x forward multiple, near a decade high.

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