Cumulative Breadth Deteriorates Further
The major equity indexes closed mostly lower Tuesday with negative internals on the NYSE and NASDAQ as trading volumes dipped below those of the prior session. One more index broke support, leaving the bulk of the charts in near-term negative trends while cumulative breadth deteriorated further. The data remains rather mixed although two of the McClellan OB/OS Oscillators dipped into oversold territory. Investment advisor sentiment and valuation remain concerns.
We are of the opinion that an attractive buying opportunity may be forthcoming when sentiment data and valuation come more into line. However, we cannot predict when that will occur. Until then, we are maintaining our near-term “neutral/negative” outlook for the equity markets until bottoming signals start to appear.
On the charts, the bulk of the indexes closed lower yesterday with negative internals except for the COMPQX (page 3) and NDX (page 3) posting gains, largely due to the action in the FAANG stocks.
- While the NDX managed to close back above its 50 DMA, the MID (page 4) closed below support and is now short term negative as are all the other index charts except the DJT (page 4) and VALUA (page 5) that are neutral.
- Bottoming signals on the charts have yet to appear.
- Breadth deteriorated further that pushed the already negative cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ below their 50 DMAs.
The data remains mixed.
- The 1-day McClellan OB/OS Oscillators now find the All Exchange and NYSE in oversold territory with the NASDAQ still neutral (All Exchange: -57.22 NYSE: -67.86 NASDAQ: -49.7).
- Psychology continues to be of some concern, in our opinion. The Open Insider Buy/Sell Ratio (page 9) remains neutral at 35.6 while the Rydex Ratio (contrarian indicator) remains bearish at 1.01. This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) remains bearish at 20.4/59.2. We continue to monitor the high levels of bullish opinions on the part of investment advisors and leveraged ETF traders as cautionary signals that, in our view, require some rather significant shifts to become more encouraging.
- The valuation gap remains extended with the SPX forward multiple dipping to 21.7 with consensus forward 12-month earnings estimates from Bloomberg rising to $156.30 while the “rule of 20” still finds fair value at 19.2. Said valuation extension has been present for the past several months.
- The SPX forward earnings yield is 4.61% with the 10-year Treasury yield at 0.7%.
In conclusion, neither the charts or data are yielding signals that the recent market weakness has been fully expressed while advisor sentiment remains overly bullish and valuation remains extended. In our view, at some point, bottoming signals will surface. Until then, we remain “neutral-negative” in our outlook.
SPX: HVS3,360/3,457 DJI: HVS27,234/28,216 COMPQX: HVS11,077/11,489
NDX: HVS11,261/11,785 DJT: 11,272/11,828 MID: HVS1,925/HVR1,966
RTY: HVS1,600/1,650 VALUA: HVS6,4325/HVR6,747