All the major equity indexes closed lower Thursday with negative internals on the NYSE and NASDAQ as trading volumes rose from the previous session.
It appears that the period of consolidation of significant recent market gains we have been expecting has been initiated as all the charts closed near their lows of the day as all. Still, one violated their near-term uptrend lines and are now neutral versus bullish in that regard. Importantly, only one index violated support.
Meanwhile, two of the three 1-day McClellan OB/OS Oscillators have shifted back to neutral from their prior overbought and cautionary levels suggesting, in our opinion, a tempering of their prior warning signs. As well, the valuation gap narrowed to some degree. As such, the consolidation action we have been expecting may have been initiated, suggesting some sideways moves over the near term.
On the charts, all the major equity indexes closed lower yesterday with negative internals on heavier trading volumes on the NYSE and NASDAQ. Selling pressure was consistent throughout the session, leaving all at or near their intraday lows at the close. Only the Dow Jones Industrial Average was able to maintain its near-term uptrend as the rest were violated, leaving all but the DJI in near-term neutral trends versus their prior bullish projections. All support levels are held except for the RTY. Market breadth suffered a bit as well. While the NYSE cumulative advance/decline line remains positive and above its 50 DMA, the positive All Exchange A/D is below its 50 DMA, with the NASDAQ now neutral and below its 50 DMJA as well. A bearish stochastic crossover was registered on the MID.
The data now finds the McClellan 1-Day OB/OS mostly neutral as opposed to their previous overbought levels that may imply a lessening of weight on the markets (All Exchange: +41.24 NYSE: +51.84 NASDAQ: +35.12). The % of SPX issues trading above their 50 DMAs (contrarian indicator) dipped to 62% and remains neutral. The Open Insider Buy/Sell Ratio declined to 50.6, also staying neutral. The detrended Rydex Ratio rose to +0.07 and is neutral versus its prior bullish implications near the market lows.
This week’s AAII Bear/Bull Ratio (contrarian indicator), while dipping, remains bullish at 1.65, while the Investors Intelligence Bear/Bull Ratio (contrary indicator page 8) is at 35.31/36.3, near peak fear levels seen 4 times over the past decade, as noted on its chart, each of which was also followed by a notable rally such as the one recently in play.
The valuation gap narrowed a bit with Bloomberg’s forward 12-month consensus earnings estimate for the SPX lifting to $228.42. As such, the SPX forward multiple stands at 19.8, with the “rule of 20” finding a fair ballpark value at 17.7. The SPX forward earnings yield is now 5.04%. The 10-year Treasury yield closed lower at 2.33. We view resistance as 2.64% while support remains at 2.0%.
In conclusion, yesterday’s action suggests to us the consolidation of gains we thought likely has been initiated and now implies some sideways action over the near term before resuming an upward path.