Rydex Ratio Dynamic Widens
All the major equity indexes closed lower Tuesday with negative internals on the NYSE and NASDAQ as trading volumes rose on the NYSE and declined on the NASDAQ from the prior session. While all posted losses, no violations of uptrends or support levels were violated. Meanwhile, the data some encouraging as well as cautionary levels registered while valuation remains extended, as has been the case for most of the rally from the March lows. When we take a view of the charts and data in aggregate, there was not enough of a shift to alter our current near-term “neutral/positive” outlook for the equity markets.
On the charts, all the indexes closed lower Tuesday with negative internals on the NYSE and NASDAQ.
- However, the weakness did not result in any important technical signals being generated as all uptrends and support levels remained intact.
- All the charts remain in near-term uptrends, above support and above their 50 DMAs.
- The stochastic levels remain overbought but have as yet to register bearish crossover signals.
- Breadth remains positive with the cumulative advance/decline lines for the All Exchange, NYSE and NAASDAQ in uptrends and above their 50 DMAs.
The data sent some mixed signals.
- The 1-day McClellan OB/OS Oscillators saw declines in their overbought conditions to a larger degree than what yesterday’s minor weakness would typically generate with the NYSE 1-day level dropping back to neutral (All Exchange: +56.41 NYSE: +45.25 NASDAQ: +67.45). We view that action as somewhat positive.
- However, the gap between the Open Insider Buy/Sell Ratio (page 9) and Rydex Ratio (both contrarian indicators) has widened and is becoming more of a concern. Insiders continued to increase their selling activity to 28.3, and just shy of bearish levels, while the Rydex Ratio saw the leveraged ETF traders intensify their leveraged long exposure to a bearish 1.29. Historically, insiders have been the on the right side of the trade within this dynamic.
- This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) was little changed at a bearish 23.2/+54.6 while the AAII Bear/Bull Ratio (contrary indicator) is a bullish 42.68/28.62.
- The counterintuitive % of SPX issues trading above their 50 DMAs is neutral at 69.5%.
- The valuation gap remains extended with the SPX forward multiple at 22.6 with consensus forward 12-month earnings estimates from Bloomberg of $155.74 while the “rule of 20” finds fair value at 19.3. We reiterate, said valuation extension has been present for the past several months.
- The SPX forward earnings yield is 4.43% with the 10-year Treasury yield at 0.73%.
In conclusion, the charts remain positive with trends that, in our view, should be respected until proven otherwise. However, psychology and valuation suggest investors keep tight reigns on their enthusiasm. Thus, we are keeping our near-term “neutral/positive” outlook in place for the equity markets.
SPX: 3,419/3,586 DJI: 28,216/29,148 COMPQX: 11,367/12,065
NDX: 11,563/12,1962 DJT: 11,403/NA MID: 1,908/2,007
RTY: HVS1,600/1,650 VALUA: 6,4325/6,747