Charts See More Negative Signals
Opinion
The markets closed broadly lower on Friday with negative internals on higher volumes leaving the charts with a few more scars. However, the data is now suggesting some short term bounce potential post the declines of last week. Yet, for the more intermediate term, we remain cautious as the short term downtrends have yet to be reversed while some of the sentiment data implies the “crowd” remains stubbornly overly optimistic and valuation remains historically elevated.
- On the charts, the market slide on Friday came with broadly negative internals with rising volume suggesting more distribution. Some further technical damage was seen in the large caps as the SPX (page 2) and DJI (page 2) both closed below support with the SPX closing below its intermediate term uptrend line. The MID closed below its intermediate term uptrend line as well but held support as did the RUT and COMPQX. All of the indexes closed at their lows of the day as buyers failed to enter the field near the close. As such, the short term downtrends and sideways patterns remain intact.
- Looking at the data, there is, in our opinion, some reason to expect a bounce at this point post last week’s decline. The 1 day McClellan OB/OS Oscillators are oversold on the NYSE (-94.99) and NASDAQ (-52.03). Their 21 days are both neutral at -24.58 and -31.18 respectively. The WST Ratio and its Composite ae both bullish at 18.8 and 74.6 while flashing a “bull alert” signal. The Total and Equity Put/Call Ratios (contrary indicators) are bullish as well at 1.13 and .79. As such, we suspect the data suggest some near term bounce potential.
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- The intermediate term remains more questionable, in our opinion, as the Rydex Ratio (contrary indicator) at 65.0 still shows the leveraged ETF traders ignoring the damage and remaining near peak levels of leveraged long exposure. As well, with the forward 12 month P/E for the SPX at 15.7X and at the upper end of its decade range, we would expect to see some moderation of both of these levels as has historically been the case in order to become more constructive.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.37% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.63 versus the U.S. 10-Year yield of 2.1%.
- S&P 500: 1,999/2,053
- Dow 30: 17,162/17,802
- NASDAQ Composite: 4,654/4787
- Dow Jones Transportation: 8,757/9,110
- S&P Midcap 400: 1,401/1,434
- Russell 2000: 1,155/1,191