Data & Valuation Turn More Encouraging
The major equity indexes closed notably lower Wednesday with broadly negative internals on the NYSE and NASDAQ as trading volumes swelled from the prior session. All closed at or near their intraday lows with all the charts breaking below their near-term support levels. All are now in near-term downtrends and below their 50 DMAs.
However, the data and valuation metrics are becoming more encouraging, suggesting the possibility that we may be nearing a near-term bottom. Yet, until we start to see encouraging signals on the charts and market breadth, we are maintaining our near-term “neutral/negative” outlook for the equity markets.
On the charts, all the indexes closed lower yesterday with very negative internals on heavy trading volume.
- Virtually all broke below their near-term support levels and are in near-term downtrends.
- As well, several closed below their 50 DMAs that now makes that condition unanimous.
- Breadth deteriorated further with the cumulative advance/decline lines for the All Exchange NYSE and NASDAQ negative and below their 50 DMAs as well.
- However, we now find all the stochastic readings oversold. They may stay in that condition for a while. Nonetheless we will keep our eyes pealed for any bullish crossover signals.
On the positive side, the data actually improved.
- The 1-day McClellan OB/OS Oscillators are now mostly very oversold and suggesting a possible pause/bounce from the recent rout. (All Exchange: -108.18 NYSE: -122.16 NASDAQ: -97.69).
- However, psychology continues to be of some concern, in our opinion.
- The Open Insider Buy/Sell Ratio (page 9) remains neutral but lifting to 41.1 while the Rydex Ratio (contrarian indicator) remains bearish at 1.0.
- This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) remained bearish at 20.4/59.2. We await next weeks investment advisor bear/bull numbers to see if the recent drop has impacted their overly bullish sentiment. We would view a shift in their part to the bearish side to be encouraging.
- The valuation gap shrank its overvalued status to its narrowest level in a while with the SPX forward multiple dipping to 20.1 with consensus forward 12-month earnings estimates from Bloomberg dipping to $156.08 while the “rule of 20” still finds fair value at 19.2. As such, valuation has become less threatening, in our opinion.
- The SPX forward earnings yield is 4.77% with the 10-year Treasury yield at 0.78%.
In conclusion, the recent carnage in the markets may be setting up a buying opportunity as the data and valuation have become more encouraging. However, we are maintaining our near-term “neutral/negative” outlook until we see a shift in sentiment and potential bottoming signals on the charts.
SPX: HVS3,250/HVR3,360
DJI: 26,290//27,557
COMPQX: HVS10,939/11,489
NDX: 11,077//11,495
RTY: 15948/1,590 VALUA: 6,265/6,5510