Indexes Close Mixed Within Bearish Chart TrendsSome Data Suggesting Bounce
The major equity indexes closed mixed yesterday with negative NYSE internals as the NASDAQ had negative breadth, but slightly positive up/down volume as overall trading volumes declined.
All closed near the midpoints of their intraday ranges, leaving all the near-term downtrends on the charts intact. Some of the data, however, is suggesting the potential for a near-term bounce although said bounce would occur within negative trends.
And as forward 12-month earnings estimates for the SPX continue to lift, the rise in the 10-year Treasury yield continued to put pressure on the SPX’s forward fair value multiple even though the SPX forward P:E is currently trading at a discount to said fair value.
As such, while the futures are positive ahead of today’s Fed interest rate decision, we believe improvement on the charts and market breadth are needed to suggest demand has finally overpowered supply.
On the charts, the major equity indexes closed mixed yesterday with the COMPQX, NDX, and DJT posting gains as the rest declined. Yet said gains were insufficient to alter any of the near-term bearish trends that currently exist on all the charts.
Meanwhile, cumulative market breadth remains negative for the All Exchange, NYSE and NASDAQ. And while the stochastic levels are quite oversold across the board, no bullish crossovers have appeared.
We believe the current trends should be respected until there is sufficient improvement in trend and breadth to assume demand has taken control over supply.
Regarding the data, all the McClellan 1-Day OB/OS oscillators are oversold with the NYSE very oversold and suggesting a bounce (All Exchange: -87.64 NYSE: -116.02 NASDAQ: -68.86).
- The % of SPX issues trading above their 50 DMAs (contrarian indicator) stands at 5% and well below the 25% trigger line, remaining bullish.
- The Open Insider Buy/Sell Ratio increased to 69.1 as insiders did some buying, staying neutral.
- On the other hand, he detrended Rydex Ratio (contrarian indicator) at -1.94 remains in bullish territory as the leveraged ETF traders are still highly leveraged short.
- This week’s AAII Bear/Bull Ratio (contrarian indicator) remains very bullish at 1.89.
- The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remained on a very bullish signal and still near a decade peak of fear at 40.0/35.72. We repeat, only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms.
- The forward 12-month consensus earnings estimate from Bloomberg for the SPX was unchanged at $236.84. As such, the SPX forward multiple is 15.8 and at a discount to the “rule of 20” finding ballpark fair value at 16.5.
- The SPX forward earnings yield is 6.34%.
- The 10-year Treasury yield closed higher at 3.48%. We view support as 3.0% and new resistance at 3.51%.
In conclusion, as the futures indicate a positive open and the data implies a bounce as valuation has been very compressed over the past few months, the Fed decision typically creates volatility around its announcements.
So, while tempted to be more optimistic, we have yet to see enough evidence that the demand side of the equation has strengthened enough to overpower the recent abundance of supply.
SPX: 3,724/3,905 DJI: 30,314/31,433 COMPQX: 10,532/11,337 NDX: 11,122/11,836
DJT: 12,660/13,384 MID: 2,262/2,512 RTY: 1,705/1,760 VALUA: 7,958/8,484