Index Charts Remain Mostly Neutral, Data Mixed
All the major equity indexes closed lower Friday with negative internals on the NYSE and NASDAQ as trading volumes slowed from the prior session on both exchanges.
Most closed near their intraday lows. However, no violations of support were registered although one chart shifted to near-term neutral from bullish, leaving all but one in that condition.
The data remains mixed with the McClellan 1-day OB/OS Oscillators overbought, but the psychology numbers remain at historically high levels of fear while the chatty, market breadth and valuation have managed to improve nicely over the past several sessions.
Thus, we remain of the opinion that selective buying is appropriate, especially for those with medium to longer time horizons.
On the charts, all the major equity indexes closed lower Friday with negative internals on lighter volume. While most closed near ether intraday lows, no violations of support were registered.
However, the SPX did close below its near-term uptrend line, shifting its trend to neutral from bullish. The rest of the charts are neutral as well except for the NDX that is near-term bullish, in our opinion.
The sessions' weakness had no impact on the cumulative advance/decline lines for the All Exchange, NYSE, and NASDAQ that remain positive. Stochastic levels continue to be overbought but no bearish crossovers have been triggered thus far.
The McClellan 1-Day OB/OS oscillators remain overbought with the NYSE very overbought (All Exchange: +70.83 NYSE: +118.66 NASDAQ: +68.81).
- The % of SPX issues trading above their 50 DMAs (contrarian indicator) dropped to 35%, staying neutral.
- The Open Insider Buy/Sell Ratio declined to 52.7 from 70.7, but also stayed neutral.
- However, the detrended Rydex Ratio (contrarian indicator) remains very bullish at -4.16 as the ETF traders are extremely leveraged short at a level seen only once in the past decade at the beginning of 2019. From that point the market rallied until March of 2020 when COVID arrived on the scene. As such, the Rydex/Insider dynamic remains very encouraging.
- Last week’s AAII Bear/Bull Ratio (contrarian indicator) remained very bullish, rising to 2.18 from 1.97. The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remained on a very bullish signal and near a decade peak of fear at 40.8/228.28. Only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms. In our view, the sentiment numbers are quite encouraging.
- The forward 12-month consensus earnings estimate from Bloomberg for the SPX slipped to $235.98. As such, the SPX forward multiple is 17.4 with the “rule of 20” finding ballpark fair value at 17.0.
- The SPX forward earnings yield is 5.74%.
- The 10-year Treasury yield closed higher at 2.96% and above resistance. We view new support as 2.89% and resistance at 3.0%.
In conclusion, the improvement over the past several sessions in market breadth, index chart trends, compression of valuation and extreme levels of fear suggest to us that selective buying is appropriate.
SPX: 4,029/4,194 DJI: 31,975/33,358 COMPQX: 11,543/12,512 NDX: 1485/12,058
DJT: 13,790/14,515 MID: 2,419/2,550 RTY: 1,790/1,945 VALUA: 8,584/9,026