Contrarian Data Very Bullish
All of the indexes closed deeply lower yesterday as intense selling pressure continued. All of the index charts broke below their respective support levels as market breadth deteriorated further. Given the state of the charts and breadth, we are forced to maintain our near term “neutral/negative” outlook for the indexes in place. However, the data is strongly suggesting that the recent salvo of stocks has hit an extreme level coincident with prior market bottoms that historically proved to be buying opportunities.
- On the charts, all of the indexes closed notably below their respective short term support levels on higher volume and terrible internal breadth. All closed near their lows of the day. So, as of the close, we have yet to see any evidence that the tide has turned to a more encouraging message. However, one contrarian indicator suggests the selling may be reaching a climax. The % of SPX stocks trading above their 50 DMAs has shrunk down to only 13.7%. While one may think this a negative, it is in fact a level seen at market bottoms due to the intensity of the selling. The current level was registered at the market lows of January and February of this year.
- The data is now at levels also seen at market lows similar to the % 50. All of the McClellan OB/OS Oscillators are deeply oversold with the 21 day readings at their deepest level since January 2016, an important market bottom. And while the crowd is crushing itself at the exits as seen by the detrended Rydex Ratio (contrarian indicator page 8) that finds the leveraged ETF traders very heavily invested in leveraged short ETFs at -1.11, only surpassed at the market lows of September 2015 and March 2016, insiders are buying their stock at a furious pace not seen January 2016 with a current 144.7 Open Insider Buy/Sell Ratio (page 9). In our experience, when the crowd is jumping ship and insiders are on a buying spree, it’s best to follow the insider’s action. Seasonality also offers a ray of hope. The November to April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative. Valuation, assuming current estimates hold, is below implied fair value with the forward 12 month earnings estimates for the SPX via Bloomberg at $172.35 leaving the forward 12 month p/e for the SPX at 15.4 versus the “rule of 20” implied fair value of a 16.9 multiple. The “earnings yield” stands at 6.49%.
- In conclusion, while the data suggests a buying opportunity is unfolding, the charts and market breadth have yet to send signals that would confirm. Until that happens, we are forced to keep our near term “neutral/negative” outlook for the major equity indexes in place.
- SPX: 2,648/2,750
- DJI: 24,457/25,320
- NASDAQ: 7,068/7,427
- NDX: 6,769/7,082
- DJT: 9,820/10,357
- MID: 1,771/1,863
- Russell: 1,464/1,539
- VALUA: 5,798/6,850