Stochastic Levels Oversold
All of the major equity indexes closed lower again on Wednesday with broadly negative internals on the NYSE and NASDAQ as overall trading volumes accelerated from the previous session. Virtually all of the indexes closed below their near term support levels as the downtrends continued. However, the data is now suggesting the potential for a pause/bounce over the near term, albeit it would be occurring within said downtrends. Valuation appears appealing as forward estimates from Bloomberg for the SPX rose yesterday due to the roll off of Q3 ’19 and addition of Q3 ’20 estimates. However, the charts continue to suggest we maintain our near term “neutral/negative outlook for the major equity indexes at this point.
On the charts, all of the major equity indexes closed lower yesterday with heavy volume and negative breadth.
- Each of the indexes closed below their near term support levels with the SPX (page 2) closing below its long term uptrend line.
- All are below their 50 DMAs as well while the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are negative.
- High “volume at price” (VAP) levels are seen as supportive on the SPX, DJI, NDX and MID while resistant on the rest.
- We would note, however, all but the NDX (page 3) now find their respective stochastic levels oversold. Granted none have registered “bullish crossover signals” at this point and can remain oversold for extended periods. Yet they offer a slight bit of encouragement, in our opinion.
Some of the data is suggesting some potential for a pause/bounce within the current downtrends via the 1 day McClellan OB/OS Oscillators that are now very oversold on the All Exchange and NASDAQ while the NYSE is only a few points from being in the same condition (All Exchange:-100.01 NYSE:-97.81 NASDAQ:-105.37). This does not suggest they cannot become more oversold. Yet it does imply some moderation of near term risk.
- The detrended Rydex Ratio (contrary indicator) is a neutral +0.22 as is the % of SPX stocks trading above their 50 DMAs sliding to 32.3.
- The AAII Bear/Bull Ratio (contrary indicators) remains neutral at 30.33/32.30 with the Investor’s Intelligence Bear/Bull Ratio (contrary indicator) bearish at 16.8/55.1.
- The Open Insider Buy/Sell Ratio remains neutral at 60.1.
- Valuation appears appealing given the sizable lift in forward 12 month earnings estimates for the SPX from $170.55 to $175.24 due to Bloomberg’s calculation adjustment mentioned above, leaving the forward p/e at a 16.5 multiple while the “rule of twenty” finds fair value at 18.4.
- The 10-Year Treasury yield stands at 1.6%.
- The earnings yield is 6.06%.
In conclusion, we are maintaining our near term “neutral/negative” outlook for the major equity indexes with the caveat that oversold conditions may offer a pause/bounce within the current downtrends.