Contrarian Data Still Very Bullish
All of the indexes closed higher Thursday with positive internals on the NYSE and NASDAQ as NYSE volumes rose above those from the prior session while those on the NASDAQ declined. Unfortunately, in spite of the sizable gains, none of the short term downtrends on the charts were violated. On the data side, the contrarian indicators have intensified their signals coincident with market bottoms on a historical basis. Nonetheless, until we see some improvement in trends on the index charts as well as market breadth, we are forced to maintain our near term “neutral/negative” outlook for the major equity indexes.
- On the charts, all of the indexes closed notably higher yesterday with positive internals on the NYSE and NASDAQ. Most closed in the upper end of their intraday ranges. Yet in spite of the notable gains, the moves were not sufficient to push prices above their short term downtrend lines that remain intact. And while breadth improved, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain negative and below their 50 DMAs.
- On a brighter note, the contrarian data is intensifying its implication that a market bottom is being established. Regarding the McClellan OB/OS Oscillators remain oversold with the exception of the NYYSE 1 day turning neutral (All Exchange:-50.6/-101.95 NYSE:-43.03/-88.55 NASDAQ:-58.29/-116.19. The intensified signals are coming from the detrended Rydex Ratio (contrarian indicator page 8) that shows the leveraged ETF traders their most heavily leveraged sort exposure since the market lows of March 2016. On the opposite side, the Open Insider Buy/Sell Ratio (page 9) finds insiders buying their stock with intensity not seen since 2011 at 191.6. The crowd is dumping stock in a panic while insiders are buying with intense appetite. We also find the % of SPX stocks trading above their 50 DMAs at a depressed level associated with market lows at 16.5%. Seasonality still offers a ray of hope. The November to April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative. Valuation, assuming current estimates hold, is below implied fair value with the forward 12 month earnings estimates for the SPX via Bloomberg at $172.44 leaving the forward 12 month p/e for the SPX at 15.7 versus the “rule of 20” implied fair value of a 16.9 multiple. The “earnings yield” stands at 6.37%.
- In conclusion, while the data suggests a buying opportunity is unfolding, the charts and market breadth have yet to send signals that would confirm. Until that happens, we are forced to keep our near term “neutral/negative” outlook for the major equity indexes in place.
- SPX: 2,648/2,750
- DJI: 24,457/25,320
- NASDAQ: 7,068/7,427
- NDX: 6,769/7,082
- DJT: 9,820/10,357
- MID: 1,771/1,863
- Russell: 1,464/1,539
- VALUA: 5,798/6,850