Psychology & Valuation Remain Cautionary
All the major equity indexes closed Friday with negative internals on the NYSE while the NASDAQ's were positive. Trading volumes declined on both exchanges from the prior session. While no violations of support were registered on the charts, two closed below their near-term uptrend lines, leaving only one index left in said uptrend. As well, more bearish stochastic crossovers were registered. And while most of the charts are now neutral, psychology data and valuation continue to send cautionary signals. So, as the futures are pointing to a higher open this morning, the charts and data continue to suggest we maintain our near-term “neutral” outlook for the equity markets.
On the charts, all the major equity indexes lower Friday with most closing at ort near their intraday lows.
- No violations of support were registered. However, the DJT (page 4) and VALUA (page 5) closed below their near-term uptrend lines, leaving only the MID (page 4) in a near-term positive trend.
- All others are neutral.
- As well, the SPX (page 2), DJI (page 2) and DJT saw bearish stochastic crossover signals generated. Only the MID and VALUA have yet to generate such a signal.
- However, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive and above their 50 DMAs at this stage.
- Our net takeaway is the charts have been gradually weakening over the past several sessions.
The data, in our opinion, continues to suggest some caution is warranted for the markets.
- Friday’s declines brought the 1-day McClellan OB/OS Oscillators on the All Exchange and NASDAQ back to neutral (All Exchange: +47.05 NYSE: +46.9 NASDAQ: +46.99).
- The Open Insider Buy/Sell Ratio (page 9) remains in neutral territory at 27.5 but continues to be in a downtrend as the number of insider selling transactions has been outweighing purchases over the past several sessions.
- Meanwhile, the detrended Rydex Ratio (contrarian indicator) moved into very overbought levels at 1.51 as the leveraged ETF traders further extended their leveraged long exposure. We reiterate the total leverage for the Rydex is at a 3-year high. Similar relative exposure occurred 4 times over the past 3 years, each of which was followed by a notable market correction.
- Last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw a decline in bearish advisors as bullish sentiment increased and remains bearish at 196.4/59.2.
- The valuation gap remains extended, in our view, with the SPX forward multiple of 22.4 with consensus forward 12-month earnings estimates from Bloomberg of $159.01 while the “rule of 20” finds fair value at 19.2.
- The SPX forward earnings yield is 4.47% with the 10-year Treasury yield at 0.83%.
In conclusion, the charts, in our opinion, while not negative, have been undergoing a slow weakening of structure of late. Meanwhile, Rydex leverage, insider selling and valuation suggest portfolios should likely be somewhat more conservative in their construction. We remain “neutral” in our near-term outlook.
SPX: 3,522/3,618
DJI: HVS28,440/29,796
COMPQX: HVS11,477/11,958
NDX: HVS11,611/12,185
DJT: HVS11,603/NA
MID: HVS2,010/NA
RTY: 1,700/NA
VALUA: HVS6,683/NA