Near Term Outlook Remains 'Neutral'
The major equity indexes closed lower yesterday with broadly negative internals on the NYSE and NASDAQ as trading volumes rose from the prior session. The charts saw some further technical damage while cumulative breadth deteriorated as well. With that said, the data is suggesting a bounce in the markets over the near term while some psychology data has taken a slightly encouraging turn. Nonetheless, while we now suspect a bounce is forthcoming, the question will be whether or not it will be sustainable. That has yet to be determined. As such, we are maintaining our near-term “neutral” macro-outlook for equities at this time.
On the charts, all the major equity indexes closed lower yesterday with broadly negative internals and heavier trading volume. All closed at or near their intraday lows.
- Both the RTY (page 5) and VALUA (page 5) closed below support with the RTY now in a negative trend.
- As well, the DJT (page 4) and MID (page 4) closed below their near-term uptrend lines and are now neutral.
- Also, the DJT and DJI (page 2) flashed bearish stochastic crossover signals.
- So, regarding trend, the SPX and VALUA remain positive with the RTY negative and the rest neutral.
- Cumulative breadth turned negative on the All Exchange, NYSE and NASDAQ. However, as breadth has deteriorated in a declining market, we view the action as a lagging indicator in this case.
Regarding the data, the McClellan 1-day OB/OS Oscillators are now suggesting a bounce as all are oversold (All Exchange: -74.6 NYSE: -73.83 NASDAQ: -75.3).
- The Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders remains neutral at 0.58 but implies those traders actually started putting on some leveraged short exposure.
- In contrast, the Open Insider Buy/Sell Ratio up ticked to 30.8. While it remains neutral, it indicates insiders saw a slight increase in their appetite to buy their own stock.
- This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) changed slightly to a mildly bearish 19.6/55.9 from its prior bearish level. Their overly optimistic expectations have moderated slightly. It is a welcome change, in our opinion, but not a game changer at this point.
- Valuation still appears extended with the forward 12-month consensus earnings estimate from Bloomberg dipping to $174.50, leaving the SPX forward multiple at 22.4 while the “rule of 20” finds fair value at 18.4. We reiterate the valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.
- The SPX forward earnings yield stands at 4.46%.
- The 10-year Treasury yield also dipped to 1.64% but remains in a short-term uptrend at this point. We continue to monitor it closely as it has been having rather significant influence on the equity markets of late.
In conclusion, while the charts have taken on some damage, the data is now suggesting some relief from the recent market weakness. However, it is too early to project if said relief is sustainable. We remain “neutral”.
DJI: 32,357/32,800
COMPQX: 13,040/13,420
NDX: 12,690/13,140
MID: 2,527/2,660
VALUA: 8,861/9,193