More Short-Term Downtrends Violated
The indexes closed mixed Tuesday with negative internals on the NYSE and NASDAQ as volumes rose from the prior session, more improvements were registered on the charts, following on the heels of those achieved during Monday’s session. The data remains a mixture of primarily neutral and positive signals. As such, we think there has now been a sufficient shift in the weight of the evidence to change our near term outlook from ”neutral” to “neutral/positive”.
On the charts, the indexes saw the MID (page 4), RTY (page 5) and VALUA (page 5) close lower on the day as the rest posted gains. Market internals were negative. More improvements were seen on the charts, following those achieved on Monday and detailed in yesterday’s note. The SPX (page 2) closed above its short term downtrend line, turning its trend from negative to neutral, as did the NDX (page 3) and DJT (page 4). As such, the only index remaining in a near term downtrend is the DJI (page 2). All of the others are neutral as are all of the cumulative advance/decline lines. We would also note the NDX flashed a “bullish stochastic crossover” signal.
The data remains a mix of generally neutral and positive readings. All of the McClellan OB/OS Oscillators remain neutral (All Exchange:+2.0/-0.95 NYSE:-4.76/+5.93 NASDAQ:+9.29/-4.16) suggesting potential for further upside, in our opinion. The Total and Equity Put/Call Ratios (contrary indicators) remain bullish at 0.92 and 0.7 respectively while insiders continue their buying moving the Open Insider Buy/Sell Ratio up to 107.7 while staying in neutral territory. The detrended Rydex Ratio (contrary indicator) still finds the leveraged ETF traders leveraged short at -1.16. Only the OEX Put/Call Ratio is cautionary as the pros are very long puts at 3.21. 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 $170.81, 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, given the violations of downtrends, bullish stochastic crossover signals and current data levels, we are now of the opinion that the near term outlook for the major equity indexes has turned “neutral/positive”.