Breadth Still Negative for the Large-Cap Indexes

 | Aug 30, 2017 | 10:00 AM EDT
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One thing to watch with the large-cap indexes is breadth, and that was not encouraging, as it was negative. Up/down volume was negative as well.

The indexes closed mostly higher on Tuesday, although internals were negative on the NYSE. Nasdaq internals were positive, as volumes rose from prior levels on both exchanges.

No major technical events occurred on the charts, leaving most of the indexes in their short-term downtrends. The data are almost entirely neutral.

As such, given the current trends, market internals, valuation, margin exposure and advisor complacency, we remain of the opinion that risk outweighs reward at present.

On the charts, the bulk of the indexes closed higher on Tuesday, with the exceptions of the S&P Midcap 400 index and Value Line Arithmetic Index closing lower.

Advances on the large-cap indexes, however, occurred on negative breadth and negative up/down volume.

No important technical events occurred beyond the COMPQX (page 3) closing back above its 50-day moving average while remaining in its neutral short-term trend.

The Dow Jones Industrials near-term trend is neutral as well, while the rest of the indexes find themselves confined within short-term downtrends. Cumulative advance decline lines are neutral on the All Exchange and NYSE, while the Nasdaq remains negative.

The data are almost entirely neutral including all of the McClellan OB/OS Oscillators (All Exchange:+10.91/-27.84 NYSE:+0.91/-20.79 NASDAQ:+19.76/-34.130.

The Total, Equity and OEX Put/Call Ratios are all neutral at 0.77, 0.61 and 1.26 respectively. Margin debt exposure has declined a bit, but remains 15.9% higher on a y/y basis and a concern.

S&P 500 forward valuation remains near historic highs at 17.8, as does margin exposure (up 15.9% y/y) and investment advisor complacency as seen by the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 18.1/50.5.

When combined with what we perceive to be a narrowing of market breadth, we continue to view market risk as high versus potential reward.

Forward 12-month earnings estimates for the SPX from Bloomberg of $137.23 leave a 5.56% forward earnings yield on a 17.8 forward multiple, near a decade high.

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