Given the weak action Wednesday morning combined with stochastic levels, we believe that tests of support levels may be forthcoming (more below). However, unless said supports are broken, we are maintaining our near-term "neutral/positive" outlook for the major equity indices.
The indices closed mixed Tuesday with positive internals on the NYSE while NASDAQ internals were negative. Volumes declined on both exchanges from the prior session. No major technical events occurred on the charts although stochastic levels have become overbought.
The S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and Nasdaq 100 closed higher while the Dow Transports, S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index posted losses.
The S&P (see below) did manage to close above resistance while the Dow Transports closed back below its 50-day moving average. We would note the advances on the two Nasdaq indices occurred with negative internals, masking weak breadth.
What stands out for us Wednesday morning is the condition of the stochastic levels that are now overbought across the board with the exception of the Transports. For the greater part of this year, overbought stochastics have typically been followed by pauses or retracements of the preceding gains. As such, when combined with the weak action this morning, we suspect tests of support levels on the charts may be on the way.
The data is quite mixed and yielding no dominant directional implications.
The bulk of the McClellan Overbought/Oversold Oscillators are neutral (All Exchange:+23.15/+35.34 NYSE:+37.8/+51.26 NASDAQ:+12.3/+21.54). The bullish signals from the Total (0.98) and Equity (0.74) Put/Call Ratios (contrary indicators) are being counter-balanced by a very bearish 2.13 OEX Put/Call Ratio as the pros are loaded with puts.
The OpenInsider Buy/Sell Ratio (39.9) and detrended Rydex Ratio (0.91) are both neutral.
The S&P 500 is trading at a P/E multiple of 16.7x consensus forward 12-month earnings estimates of $167.41 per share, versus the "rule of 20" implied fair value of 17.1x.