Most Charts Break Support
All of the indexes closed notably lower yesterday with negative internals on the NYSE and NASDAQ as volumes decline from Friday’s levels. All but one of the index charts closed below support, turning their trends neutral. The data remains mixed but with one long standing positive indicator. As recently mentioned, the DJI had over a 2,000 point trough to peak rally that, in our opinion, would likely result in some consolidation/retracement of those gains. Another 130 points down on the DJI would be a 50% retracement. Given the breaks on the charts yesterday and current data readings, we are moving our near term outlook to “neutral” as we are now of the opinion that some sideways chop with some lessening of volatility will likely be the course for the near term.
- On the charts, all of the indexes closed lower yesterday with all but the DJT (page 4) closing below support. Near term uptrend lines on the SPX (page 2), DJI (page 2) and MID (page 4) were violated as well. Thus, all of the near term trends are now “neutral”. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ have turned neutral as well. Multiple “bearish stochastic crossover signals” were also generated. However, those may be corrected by a period of sideways trade.
- The data is mixed with all of the McClellan OB/OS Oscillators neutral (All Exchange:+4.08/-19.25 NYSE:+14.69/-1.46 NASDAQ:-5.71/-34.13). The rest of the indicators are mostly neutral as well. However, we would reiterate the detrended Rydex Ratio (contrary indicator page 9) is sending an important bullish signal as its -1.75 reading has only been seen four times prior to now since 2009. In each case, it was coincident with a market low when the crowd became exceedingly leveraged short after a market correction. Seasonality remains encouraging has 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 fair value with the forward 12-month earnings estimates for the SPX via Bloomberg of $171.76, leaving the forward 12-month p/e for the SPX at 15.9 versus the “rule of 20” implied fair value of a 16.8 multiple. The “earnings yield” stands at 6.3%.
- In conclusion, the charts and breadth have shifted enough to warrant a move to a more “neutral” outlook for the near term regarding the major equity indexes. Yet we would reiterate our opinion that this is normal given the 2,000 point rally off of the DJIs intraday low. It suggests some sideways action is likely for the near term prior to, in our opinion, moving higher.
- SPX: 2,706/2,817
- DJI: 25,253/28,832
- Nasdaq: 7,159/7,639
- NDX: 6,800/7,082
- DJT: 10,347/10,746
- MID: 1,845/1,917
- Russell: 1,500/1,578
- VALUA: 5,936/6,243