Some Sentiment Shows Improvement
Opinion: Friday’s bounce in the equity markets was unable to have any technical impact in the charts of the major indexes that remain in short term downtrends. However, we are now seeing a shift in some of the sentiment data, post the recent correction, suggesting some fear has reentered investor psychology that could lead to some short term sideways action for the major equity indexes.
- On the charts, Friday’s gains came on positive breadth but unremarkable volume. None of the gains were large enough to penetrate near term resistance levels listed below or reverse the current downtrends. The All-Exchange, NYSE and NASDAQ advance/decline charts all remain below their 50 DMAs and in downtrends. However, we would note the percent of SPX stocks trading above their 50 DMAs has shrunk to 32.9% which is near levels where some stabilization has tended to take place during past corrections. One thing to keep in mind, in our opinion, is that, if our assumption is correct, what we believe may be a head and shoulders formation on the MID (page 4) has yet to fulfill its downside target of 1,339.
- The data has seen some improvement regarding psychology. The detrended Rydex Ratio (contrary indicator) shows the leveraged ETF traders becoming more cautious as it has dropped to a neutral 0.05. The AAII Bear/Bull Ratio (contrary indicator) has also improved as bears now outnumber bulls at 38.23/30.89 as the crowd has shed its prior complacency. Meanwhile, insiders have picked up their buying according to the Gambill Insider Buy/Sell ratio at 22.3% and just shy of giving a bullish signal. The OEX Put/Call Ratio is a neutral 1.27 along with all of the McClellan OB/OS Oscillators (NYSE:-30.06/-32.74 NASDAQ:-0.25/-39.68). So, as a whole, we believe the data is suggesting some near term sideways action.
- In conclusion, although the current correction may not be complete, the data is suggesting some potential sideways action over the near term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.54 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.40 versus the 10 Year Treasury yield of 2.42%.