Sentiment Indicators Turn More Cautionary
All the major equity indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as trading volumes declined on both exchanges from the prior session. The only technical event of import on the charts was the DJT closing below its uptrend line that shifted said trend to neutral. However, the bulk of the indexes remain in near-term uptrends. The data still finds the McClellan OB/OS Oscillators in neutral territory. However, investor sentiment has become excessively bullish and in need of some repair while market breadth saw some slight deterioration. As such, while we remain “neutral/positive” in our macro-equity outlook, tests of support and/or trend on the charts is, in our view, becoming more likely. In fact, we would see such tests as positive and healthy for the market longer term.
On the charts, all the major equity indexes closed lower yesterday with negative internals.
- As noted above, the only technical event of import was the DJT (page $) closing above its near-term uptrend line post its flashing a bearish crossover signal as of Friday’s close. So, the DJT now joins the RTY (page 5) in a neutral/sideways trend as the remainder of the indexes are still in bullish uptrends.
- Market breadth saw some deterioration with the All-Exchange cumulative advance/decline line turning neutral. The NYSE A/D remains positive with the NASDAQ’s negative.
- No new bearish stochastic crossover signals were generated beyond the DJT’s as noted.
On the data, the McClellan 1-Day OB/OS oscillators are still neutral (All Exchange: -25.98 NYSE: -2.81 NASDAQ: -41.48).
- However, the sentiment indicators have turned more cautionary. The Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders moved into very bearish territory at 1.71 as they are now heavily leveraged long.
- This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) turned more bearish as well at 16.8/63.4 with the AAII a bearish 22.73/53.17. In general, bullish expectations are becoming excessive.
- The Open Insider Buy/Sell Ratio is still bearish but lifted to 19.4. We reiterate, the OI B/S tends to be more effective in marking market lows versus tops, in our opinion.
- Valuation still appears extended with the forward 12-month consensus earnings estimate from Bloomberg at $182.85. This leaves the SPX forward multiple at 22.8 while the “rule of 20” finds fair value at 18.4. The valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.
- The SPX forward earnings yield stands at 4.39%.
- The 10-year Treasury yield rose to 1.6% and remains near what we see as support at 1.55%. We now view 1.63% as resistance versus our prior 1.75% level given last week’s action.
In conclusion, despite sentiment levels, the charts and OB/OS levels suggest we stay “neutral/positive” in our near-term macro-outlook for equities while tests of trend and support may become more likely.
SPX: 4,080/NA
DJI: 33,545/NA
COMPQX: 13,846/14,100
NDX: 13,610/NA
DJT: 14,621/15,000
RTY: 2,225/2,280
VALUA: 9,176/NA