Psychology & Valuation Still Waving Yellow Flags
The major equity indexes closed lower Wednesday with negative internals on the NYSE while the NASDAQ saw negative breadth but positive up/down volume as overall volumes rose on both exchanges. All closed at or near their intraday lows as last hour selling pressure intensified. The charts saw some technical damage as several closed below their near-term uptrend lines and are now neutral versus their prior positive trends. However, no violations of support were generated. The data, in our view, is still sending some cautionary signals. While most of the 1-day McClellan OB/OS Oscillators are now neutral, the psychology data and valuation continue to imply an elevated level of near-term downside risk, in our opinion. As such, we are maintaining our near-term “neutral outlook for the equity markets at this time.
On the charts, all the indexes closed lower yesterday on high volume and near their intraday lows as late session selling pressure increased. Internals were negative on the NYSE and mixed on the NASDAQ.
- Technical events of note were the SPX (page 2), DJI (page 2), COMPQX (page 3) and NDX (page 3) closing below their near-term uptrends lines that have now shifted to neutral from positive. The rest remain in uptrends.
- Yesterday’s weakness was not sufficient to change the positive trends on the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ that remain above tier 50 DMAs while no stochastic crossovers were generated at this point.
The data, however, is still cautionary by our work.
- The 1-day McClellan OB/OS Oscillators on the All Exchange and NASDAQ dipped back to neutral while the NYSE remains overbought (All Exchange: +47.81 NYSE: +58.59 NASDAQ: +38.82).
- The Open Insider Buy/Sell Ratio (page 9) remains bearish at 24.9 as the number of insider selling transactions has been outweighing purchases.
- Meanwhile, the Rydex Ratio (contrarian indicator) continues to be bearish at 1.43 as the leveraged ETF traders continue their extended leveraged long exposure.
- Yesterday’s notable market weakness did not generate any significant buying interest by insiders while the ETF traders remain very leveraged long.
- Also, this week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw a decline in bearish advisors as bullish sentiment increased and remains bearish at 196.4/59.2. The same dynamic was registered on the AAII Bear/Bull Ratio at 28.69/43.02.
- The valuation gap remains extended with the SPX forward multiple of 22.5 with consensus forward 12-month earnings estimates from Bloomberg of $158.47 while the “rule of 20” finds fair value at 19.1.
- The SPX forward earnings yield is 4.44% with the 10-year Treasury yield at 0.88%.
In conclusion, yesterday’s action did not result in any meaningful change that would suggest a shift from our near-term “neutral” outlook for the equity markets as, in our view, some retracement of the recent rally appears likely.
SPX: 3,522/NA
DJI: HVS28,440/NA
COMPQX: HVS11,477/11,958
NDX: HVS11,611/12,185
DJT: HVS11,603/NA MID: HVS2,010/NA
RTY: 1,700/NA VALUA: HVS6,683/NA