All the major equity indexes closed higher Friday with positive internals on the NYSE and NASDAQ as trading volumes declined from the prior session. The charts saw a number of improvements, including some potential short term bottoming formations. However, we remain concerned regarding insider selling activity that continued to be present during Friday’s rally while market breadth remains negative as well. So, while the McClellan OB/OS Oscillators still suggest some further bounce potential, we are maintaining our near-term “neutral/negative” outlook for the reasons discussed below.
On the charts, all the major equity indexes closed higher Friday with positive internals on lighter trading volumes.
- The SPX (page 2) and DJI (page 2) managed to close above their near-term resistance levels as well as their 50 DMAs while the DJI closed back above its uptrend line, returning it to its prior bullish trend.
- The DJT (page 4) and MID (page4) closed above their uptrend lines as well.
- What may be of greater technical import was the COMPQX (page 3) and NDX (page 3) forming possible “hammer bottom” signals, as both opened, traded significantly lower and then managed to close at or near their intraday highs. Such action suggests a possible washout of selling pressure.
- The DJI, DJT, MID and VALUIA (page 5) are back in uptrends with the rest neutral.
- Cumulative market breadth, unfortunately, remains negative for the All Exchange, NYSE and NASDAQ.
The McClellan 1-day OB/OS Oscillators remain oversold on the All Exchange and NASDAQ, implying further bounce potential (All Exchange: -70.16 NYSE: -85.87 NASDAQ: -95.94).
- However, we continue to be concerned as the Open Insider Buy/Sell Ratio at 20.0 shows insiders continue to be largely on the sell side, even within Friday’s rally and throughout the recent market decline. We would much prefer to see them more active on the buy side, especially after such market weakness.
- The leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator page 8) was unchanged at 0.88 and remains neutral. They would produce a bottom signal when leveraged short, which has yet to appear.
- Last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) was little changed at a bearish 18.5/56.3 suggesting too much optimism exists on the part of investment advisors.
- So, the psychology basket remains cautionary.
- Valuation still appears extended with the forward 12-month consensus earnings estimate from Bloomberg of $173.70 leaving the SPX forward multiple at 22.1 while the “rule of 20” finds fair value at 18.5. 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 is 4.52%.
- The 10-year Treasury yield is 1.55 and now suggests potential to the 1.7% level, in our opinion.
We remain near-term “neutral/negative” in our outlook for the reasons discussed above.
DJI: 30,967/31,550
COMPQX: 12,762/13,189
NDX: 12,300/12,790