Charts Deteriorate Further

Near-term Outlook Remains “Neutral/Negative”

All the major equity indexes closed lower Friday with broadly negative internals on the NYSE and NASDAQ as NYSE volumes rose and NASDAQ volumes dipped from the prior session. All closed at or near their intraday lows as late session buyers failed to appear. The charts saw a number on bearish technical events registered while market breadth continued to deteriorate. On the data side, the McClellan 1-day Overbought/Oversold Oscillators are a hair’s breadth from being very oversold. However, the rest of the data has yet to join the OB/OS at levels suggesting a culmination of the recent correction. So, while the OB/OS light is turning green, we are maintaining our current “neutral/negative” macro-outlook for equities until we have further evidence that a shift may be warranted.

On the charts, all the major equity indexes closed lower Friday with negative internal on the NYSE and NASDAQ. Negative technical signals on the charts appeared as follows.

• The COMPQX (page 3) closed below its near-term uptrend line and is now neutral.
• The MID (page 4), RTY (page 5) and VALUA (page 5) closed below support with all now negative.
• Meanwhile, the DJI (page 2) gave a bearish stochastic crossover signal.
• As such, the near-term trends are positive on the DJI and NDX with the COMPQX and SPX (page 2) neutral and the rest in downtrends.
• Cumulative market breadth deteriorated further with the cumulative A/Ds for the All Exchange, NYSE and NASDAQ negative and below their 50 DMAs. In fact, the NASDAQ’s is just shy of breaking below its 200 DMA.

The data finds all the McClellan 1-Day OB/OS nearing deeply oversold territory (All Exchange: -97.59 NYSE: -93.24 NASDAQ: -99.79). Reading below -100 are considered very oversold. However, in the current environment, we have yet to see other data supporting the potential for a correction climax.

• The Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders remains bearish at 1.14 as they remain leveraged long. We would ideally like to see them leveraged short.
• Last week’s contrarian AAII bear/bull ratio (23.33/43.07) moved back into mildly bearish territory while the Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw a decline in bears and a lift in bulls, remaining bearish at 15.5/60.8. It continues to suggest an excess of bullish expectations.
• The Open Insider Buy/Sell Ratio remained a neutral 29.4 but still shows a lack of appetite for insiders to buy their own stock.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg at $199.27 for the SPX. As a result, the SPX forward multiple is 21.7 with the “rule of 20” finding fair value at approximately18.7.
• The SPX forward earnings yield is 4.6%.
• The 10-year Treasury yield closed flat at 1.3 and remains an important factor. We view support as 1.2% and resistance at 1.44%.

In conclusion, the charts and data still suggest caution is warranted for the near-term, by our work.

SPX: 4,295/4,380

DJI: 34,570/34,972

COMPQX: 14,356/14,707

NDX: 14,485/14,876

DJT: 14,247/14,905

MID: 2,572/2,665

RTY: 2,120/2,225

VALUA: 9,245/9,556