Charts and Breadth See Multiple Improvements
All the major equity indexes closed higher Monday with positive internals on the NYSE and NASDAQ as trading volumes declined from the previous session. All closed at or near their intraday highs with multiple positive technical events being registered on the charts including violations of resistance, closes above 50 DMAs and climbing back above uptrend lines. Cumulative breadth improved as well. The data finds the McClellan 1-day OB/OS Oscillators overbought, suggesting a pause/partial retracement of gains while the balance is generally neutral. Valuation continues to appear extended, although much less so as noted by the spike in forward 12-month SPX consensus earnings estimates from Bloomberg noted in yesterday’s comments. In our opinion, while we may see some retracement of recent gains, we believe we have now seen enough of a shift in the weight of the evidence to change our near-term “negative” outlook for the equity markets to “neutral/positive”.
On the charts, the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as trading volumes dipped from the prior session.
- The charts saw multiple positive technical events generated.
- The SPX (page 2), DJI (page 2), MID (page 4), RTY (page 5) and VALUA (page 5) all closed above resistance with the SPX, MID and VALUA also closing back above their 50 DMAs.
- As well, the NDX (page 3) and DJT (page 4) closed back above their uptrend lines.
- As such, all are now in near-term uptrends and above their 50 DMAs with several having high volume underlying support (noted below).
- Cumulative breadth improved as well with the All Exchange, NYSE and NASDAQ short term positive while their intermediate term downtrend lines were violated to the upside.
The data remains mixed.
- The 1-day McClellan OB/OS Oscillators are now overbought, suggesting a pause/consolidation of recent gains (All Exchange: +64.79 NYSE: +68.22 NASDAQ: +64.88).
- The Open Insider Buy/Sell Ratio (page 9) is neutral at 47.6 while the detrended Rydex Ratio (contrary indicator page 8) remains bearish at +0.87 as the leveraged ETF traders remain leveraged long.
- This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw another slight rise in bearish sentiment to 21.8/52.5 while the AAII Bear/Bull Ratio (contrary indicator) is a bullish 43.15/27.72.
- The counterintuitive % of SPX issues trading above their 50 DMAs is neutral at 61.0%.
- The valuation gap remains extended but less so, in our opinion, with the SPX forward multiple at 21.9 with consensus forward 12-month earnings estimates from Bloomberg at $155.54 with the inclusion of Q3 2021 estimates while the “rule of 20” finds fair value at 19.2.
- The SPX forward earnings yield is 4.56% with the 10-year Treasury yield at 0.76%.
In conclusion, for the reasons stated above, we are changing our near-term outlook for the equity markets to “neutral/positive” from “negative” although some consolidation may be expected.
SPX: HVS3,316/3,382
DJI: 27,132/HVR27,786
COMPQX: HVS10,986/11,315
NDX: HVS11,156/11,572
DJT: HVS11,086/11,546 MID: 1,818/HVR1,899
RTY: HVS1,450/1,500
VALUA: HVS6,199/HVR6,388