Near-Term Outlook Remains Neutral
The major equity indexes closed lower Wednesday due to late session selling pressure with negative internals on the NYSE and NASDAQ as trading volumes rose on both exchanges from the prior session. The charts saw no violations of trend or support, but all are now on bearish stochastic crossover signals as market breadth deteriorated further. The data is generally unchanged and mostly in the neutral camp, although the psychology data basket remains a concern as does valuation. As such, we are leaving our near-term outlook for the equity markets at “neutral”.
On the charts, all the major equity indexes closed lower yesterday with negative internals and heavier trading volumes as the last half hour saw an increase in selling pressure.
- No violations of support or trend were registered although the MID (page 4) and VALUA (page 5) joined the rest of the indexes that had already registered bearish stochastic crossover signals earlier in the week.
- As such, all the charts remain in near-term neutral patterns except for the DJT (page 4) and VALUA that are positive.
- Market breadth deteriorated further, however, with the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ staying negative and making lower lows.
The data remains generally neutral.
- The 1-day McClellan OB/OS Oscillators continue their neutral message (All Exchange: -26.25 NYSE: -29.69 NASDAQ: -25.37).
- Psychology continues to be of some concern, in our opinion, as the Open Insider Buy/Sell Ratio (page 9) dipped to a neutral 33.9 while the Rydex Ratio (contrarian indicator) remains bearish with the leveraged ETF traders extended in their leveraged long exposure at a bearish 1.15 and this week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) remaining bearish at 21.2/56.6. We continue to monitor the high levels of bullish opinions on the part of investment advisors and leveraged ETF traders as potential cautionary signals as they leave little room for disappointment on their part, in our view.
- The valuation gap remains extended with the SPX forward multiple at 22.0 with consensus forward 12-month earnings estimates from Bloomberg dropping to $155.87 while the “rule of 20” finds fair value at 19.2. Said valuation extension has been present for the past several months.
- The SPX forward earnings yield is 4.54% with the 10-year Treasury yield rose to 0.82% and above resistance.
In conclusion, we have yet to see enough evidence presented to alter our current near-term “neutral” outlook for the equity markets.
SPX: HVS3,419/3,586 DJI: HVS28,216/29,148 COMPQX: HVS11,367/12,065
NDX: HVS11,563/12,1962 DJT: 11,403/NA MID: 1,908/HVR2,007
RTY: HVS1,600/1,650 VALUA: HVS6,4325/HVR6,747