Psychology Is Bullish
The bulk of the indexes closed lower Tuesday with the one exception of the DJT posting a gain. Internals were negative on the NYSE and NASDAQ as volumes rose from the prior session. One chart broke below support as the remainder held or tested their levels. The data is a bit mixed but the psychology readings (contrarian indicators) are quite bullish. As such, while have been expecting some consolidation/retracement of the market gains from the 10/29 lows, we are maintaining our near term “neutral” outlook for the major equity indexes.
- On the charts, all but the DJT (page 4) closed lower yesterday with negative internals on heavy trading volume. However, we would note that while volumes were the heaviest seen in the recent correction, the bulk of the indexes held support. So technically, only the DJI (page 2) that violated support yesterday is in a downtrend as the rest are neutral. Breadth has weakened as the cumulative advance/decline lines for the All Exchange and NASDAQ turned negative again with the NYSE’s staying neutral. The bearish stochastic signals generated a few sessions back have yet to become oversold.
- The data is mixed with the 1 day McClellan OB/OS Oscillators neutral while the All Exchange and NASDAQ 21 day readings are in oversold territory (All Exchange:-10.63/-50.74 NYSE:-0.49/-34.85 NASDAQ:-19.17/-64.46). What we find notable, and encouraging, is how the psychology readings (contrarian indicators) stack up. The detrended Rydex Ratio (page 9) remains bullish at -1.65 after having recently hit extreme readings seen only four times in the past decade, all of which were coincident with market lows. The Equity (0.81), ISEE (.82) and Total (1.22) Put/Call Ratios are very bullish as the crowd is terrified and very long puts. The Open Insider Buy/Sell Ratio, while neutral, has seen a pickup in buying to 75.1 after having peaked at the recent market lows. Seasonality remains encouraging has 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. Valuation, assuming current estimates hold, is below fair value with the forward 12-month earnings estimates for the SPX via Bloomberg of $171.57, leaving the forward 12-month p/e for the SPX at 15.8 versus the “rule of 20” implied fair value of a 16.9 multiple. The “earnings yield” stands at 6.35%.
- In conclusion, while we may see some further consolidation/retracement of the recent market rally, psychology and valuation suggest not all is lost. Thus we are keeping our near term outlook for the major equity indexes at “neutral”.
- SPX: 2,700/2,817
- DJI: 24,939/25,504
- Nasdaq: 7,108/7,401
- NDX: 6,770/6,993
- DJT: 10,347/10,746
- MID: 1,839/1,917
- Russell: 1,500/1,578
- VALUA: 5,936/6,243
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