Contrarian Data Still Very Bullish
All of the indexes closed lower Monday as trade war fears increased. Internals were negative on the NYSE and NASDAQ as volumes declined from the prior session. Two of the index charts broke below support while the rest held. The data remains largely bullish with some indicators at historic levels. While we are of the opinion that the selling is overdone and will likely be viewed in hindsight as a buying opportunity, we have yet to see an improvement on the charts or market breadth that would move us from our current “neutral/negative” outlook for the major equity indexes.
On the charts, all of the indexes closed lower yesterday with negative internals on lighter trading volume form the prior session. The SPX (page 2) and NDX (page 3) closed below their support levels. However, the rest of the indexes held. Technically, all of the indexes remain in short term downtrends while the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain negative and below their 50 DMAs. It is essential that chart action and breadth improve before turning more positive in our outlook.
The data remains positive with some at historic levels. All of the McClellan OB/OS Oscillators remain oversold (All Exchange:-63.9/-123.75 NYSE:-61.53/-113.29 NASDAQ:-66.44/-135.01). The most notable data points, in our opinion, start with the fact that while the crowd is dumping it’s stock aggressively as the AAII Bear/Bull Ratio (contrary indicator) now finds bears outnumbering bulls 37.0/30.33, insiders are buying their stock with an intensity not seen since September of 2011 as indicated by the Open Insider Buy/Sell Ratio (page 9) at 245.5. If they were concerned about forward earnings growth, it would be hard to justify this action. Recent market weakness has depressed the % of SPX stocks trading above their 50 DMAs to 10.5%, a level seen at the February and April lows of this year. Seasonality still offers a ray of hope. 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. Finally, valuation, assuming current estimates hold, is well below implied fair value with the forward 12 month earnings estimates for the SPX via Bloomberg at $172.26, leaving the forward 12 month p/e for the SPX at 15.3 versus the “rule of 20” implied fair value of a 16.9 multiple. The “earnings yield” stands at 6.52%.
In conclusion, while the data suggests a buying opportunity is unfolding, the charts and market breadth have yet to send signals that would confirm. Until that happens, we are forced to keep our near term “neutral/negative” outlook for the major equity indexes in place.