Psychology Data & Valuation Improve
All the major equity indexes closed lower Friday with negative internals on the NYSE and NASDAQ as trading volumes declined on the NYSE but rose on the NASDAAQ from the prior session. Two of the index charts closed below their support levels, leaving all in short-term downtrends and below their 50 DMAs. However, the psychology data, McClellan OB/OS Oscillators and valuation improved to the point that we are now moved to shift our near-term outlook for the equity markets to “neutral” from “neutral/negative”.
On the charts, all the indexes closed lower Friday with negative internals with all closing at various points within their intraday ranges.
- The COMPQX (page 3) and NDX (page 3) closed below support as the rest held.
- Yet while all remain in near-term downtrends, the fact that most held support on a broadly negative day is slightly encouraging, in our opinion.
- Another point of interest is the DJI (page 2) possibly having formed a “hammer” signal that might imply a short-term bottom. Such signals are believed to have bullish implications when they appear after a protracted downtrend when the index or stock opens, trades notably lower intraday but manages to close at or near its intraday high at the close. The theory suggests selling pressure was exhausted, followed by enough demand to push price back up near the day’s highpoint.
- Breadth remains negative on the All Exchange, NYSE and NASDAQ and below their 50 DMAs.
- The stochastic readings are oversold on all with several in the single digits but have yet to flash bullish crossover signals.
The data saw some further improvements.
- The 1-day McClellan OB/OS Oscillators remain at oversold levels that may suggest a pause/bounce from the recent weakness (All Exchange: -85.82 NYSE: -87.49 NASDAQ: -86.19).
- Importantly, psychology improved further, in our view. The Open Insider Buy/Sell Ratio (page 9) rose again to 54.9. While still neutral, they had increased their buying activity throughout last week’s action implying they saw that weakness as a buying opportunity. In contrast the Rydex Ratio (contrarian indicator) dropped further to a neutral 0.61 as the leveraged ETF traders became more nervous and lightened up on their leveraged long exposure. As stated last week, should this dynamic continue, we would view it as a positive transition in sentiment.
- Last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) remained bearish at 20.4/59.2.
- The valuation gap narrowed its overvalued levels with the SPX forward multiple dropping to 20.1 with consensus forward 12-month earnings estimates from Bloomberg rising to $156.72 while the “rule of 20” finds fair value at 19.1, a bit less cautionary.
- The SPX forward earnings yield is 4.79% with the 10-year Treasury yield rising to 0.86%.
In conclusion, while the charts and breadth remain negative, we are of the opinion that the improvements in psychology and valuation are enough to lift our near-term outlook for the equity markets to “neutral” from “neutral/negative”.
SPX: HVS3,250/HVR3,360 DJI: 26,290//27,500 COMPQX: HVS10,759/11,346
NDX: 10,870//11,495
RTY: 15948/1,590 VALUA: 6,265/6,5510