Contrarian Data Still Very Bullish
All of the indexes closed lower Friday with negative internals as volumes rose on the NSYE and NASDAQ from the prior session. However, the intensity of the selling was not sufficient to violate any of the near term support levels, all of which were tested successfully. Yet all remain in short term downtrends with very negative breadth. We find the data quite encouraging as several of the indicators are at extreme levels historically associated with market bottoms. However, we cannot alter our near term “neutral/negative” short term outlook just yet due to trend and breadth on the charts. We would note the futures are currently indicating the indexes will open at resistance. If resistance is violated on a closing basis, we may very well have a brighter outlook tomorrow.
- On the charts, all of the indexes closed lower Friday with negative internals on heavy trading volume. However, as intense as the selling pressure was, no short term support levels were violated as all were tested successfully. That is a shift from the action earlier in the week. However, all of the short term downtrends are intact as market breadth is notably negative. The negative breadth could be viewed as encouraging as the % of SPX stocks trading above their 50 DMAs (page 9) shrank to 10.5%, the lowest level in 2 years and at a point frequently seen at market lows.
- The data continues to suggest the recent panic selling may be near completion. Insiders continue to gobble up stock with the greatest intensity since September 2015, a market low, with a 189.6 Open Insider Buy/Sell Ratio (page 9) while the detrended Rydex Ratio (contrarian indicator page 8) finds the leveraged ETF traders extremely leveraged short at -1.64. All of the McClellan OB/OS Oscillators are oversold as well (All Exchange:-66.9/-115.54 NYSE:-65.13/-105.24 NASDAQ:-69.94/-127.13). Seasonality still 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 $172.32 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 6.48%.
- 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