All the major equity indexes closed lower Friday with negative internals on the NYSE and NASDAQ as the NYSE saw volumes rise as the NASDAQ volumes dipped. The charts did see some technical weakness as a result with one violation of support as two others saw their near-term trends turn neutral from positive. Meanwhile, the psychology data and valuation continue to flash their cautionary signals. As such, we are maintaining our near-term “neutral/negative” outlook for the equity markets at this time.
On the charts, all the major equity indexes closed lower Friday with negative internals.
- Three negative technical events occurred as a result.
- The COMPQX (page 3) and DJT (page 4) both closed below their near-term uptrend lines and are now in neutral trends, in our opinion.
- As well, the NDX (page 3) closed below near-term support but remains neutral.
- So, regarding near-term trends, The COMPQX, NDX and DJT are now neutral with the remainder staying bullish at this point.
- Despite Friday’s notably negative internals, the cumulative advance/decline lines for the All Exchange, NYTSXE and NASDAQ remain bullish and above their 50 DMAs.
Regarding the data, the McClellan 1-day OB/OS Oscillators remain neutral (All Exchange: -7.22 NYSE: -13.26 NASDAQ: -1.28).
- However, the sentiment data continues to send its cautionary signals.
- The leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator page 8) are still heavily leveraged long at a bearish 1.47 while insiders maintained their selling activity with the Open Insider Buy/Sell Ratio (page 9) at a bearish 23.3.
- We think it important that throughout 2020, these conditions presented themselves four times, three of which were followed by market corrections.
- As well, last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) and AAII Bear/Bull Ratio saw a rise in bullish sentiment to 16.8/64 and 23.47/47.9 leaving both on bearish signals adding to the warnings from the insider/Rydex message. We expect new reading from them tomorrow.
- Valuation continues to appear extended as well. The forward 12-month consensus earnings estimate from Bloomberg at $166.97 leaves the SPX forward multiple 22.6 while the “rule of 20” finds fair value at 18.9 due to the recent rise in the 10-year treasury yield.
- The SPX forward earnings yield is 4.43% with the 10-year Treasury yield dipping to 1.1%.
In conclusion, we remain of the opinion that investor psychology and valuation warrant our current near-term “neutral/negative” outlook for the equity markets while Friday’s action resulted in some technical deterioration.
SPX: 3,695/NA
DJI: 30,209/NA
COMPQX: 12,692/12,858
NDX: 12,729/12,942
DJT: 12,533/NA
MID: 2,312/NA
RTY: 2,050/NA
VALUA: 8,170/NA