The Pros Are Betting on Near-Term Weakness

 | May 03, 2017 | 10:25 AM EDT
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The indexes closed mixed yesterday, with mixed internals on the NYSE and negative internals on the Nasdaq. No support/resistance levels were violated on the charts, as the Nasdaq Composite Index made a new closing high. But we now see the Nasdaq giving a "bearish divergence" signal, discussed below, with the majority of the index charts now neutral.

The data remains largely neutral, with a couple of cautionary signals appearing. As such, we are of the opinion that there has been enough of a shift in the evidence to change our near-term view from "neutral/positive" to "neutral."

On the charts, the indexes closed mixed with the NYSE having positive breadth but negative up/down volume as volumes rose. The Nasdaq internals were negative on increasing volume. Only the S&P 500 and Nasdaq Composite Index posted gains, as the COMPQX made a new closing high. Both the Russell 2000 Index and Value Line Arithmetic Index closed below their short-term uptrend lines, leaving only the SPX and COMPQX in near-term uptrends. The rest are neutral.

We would also note that the Nasdaq in now giving a "bearish divergence signal," as the COMPQX is making higher highs while the Nasdaq advance/decline line is making lower highs, suggesting internal deterioration of breadth. While the Nasdaq divergence may not be as prescient in its message as that of a NYSE divergence, it is worth noting, in our opinion.

The data is mostly neutral, including all of the McClellan OB/OS Oscillators (All Exchange:+15.28/+22.4; NYSE:+10.85/+42.03; Nasdaq:+22.17/+4.78). Both the Total and Equity Put/Call Ratios are neutral, at 0.75 and 0.61, while the OEX Put/Call Ratio is raising a red flag as the pros are awash in puts at 4.26 and betting on near-term weakness. And while the OpenInsider Buy/Sell Ratio remains neutral, insider selling is picking up momentum, as the indicator fell to 29.7.

In conclusion, given the general shift of the index trends to sideways patterns, in combination with the Nasdaq divergence signal and slightly negative tilt in the data, we are altering our near-term outlook for the major equity indexes from "neutral/positive" to "neutral."

Forward 12-month earnings estimates for the SPX from IBES of $134.44 leave a 5.64% forward earnings yield on a 17.7x forward multiple, near a decade high.

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