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Dow Turns Short Term Neutral; Investor Sentiment Data Very Encouraging

Published 06/02/2022, 09:13 AM
Updated 07/09/2023, 06:31 AM

Data Mixed, But Investor Sentiment Remains Very Encouraging

All the major equity indexes closed lower Wednesday with negative internals on the NYSE and NASDAQ as trading volumes dropped from the prior session on both.

Closing prices were mixed with some near their intraday lows with others at their midpoints. The only technical event of note was the DJI closing below its near-term uptrend line, shifting said trend to neutral from bullish.

Meanwhile, the data remains mixed. However, we continue to believe the historically extreme negative sentiment on the part of investors continues to send a very positive message.

As contrarian indicators, current and rarely seen sentiment levels have been coincident with market lows preceding rallies of note. Also, the recent compression of the SPX forward 12-month P:E has brought valuation down to more reasonable levels.

On the charts, all the major equity indexes closed lower yesterday with negative internals on the NYSE and NASDAQ, but on lower trading volume.The indexes closed mixed regarding their intraday ranges with some near their lows and others at their midpoints.

The only event of note was the DJI closing below its near-term uptrend line, shifting to neutral from bullish.The rest of the indexes remain neutral as well with the exception of the SPX staying bullish.

Cumulative market breadth remains positive on the All Exchange, NYSE, and NASDAQ advance/decline lines. Stochastic levels are overbought but have not generated bearish crossover signals yet.

The McClellan 1-Day OB/OS oscillators remain overbought but less so (All Exchange: +76.09 NYSE: +90.14 NASDAQ: +65.28).

  • The % of SPX issues trading above their 50 DMAs (contrarian indicator) dropped to 31%, staying neutral.
  • The Open Insider Buy/Sell Ratio dipped to 70.7, staying neutral as well.
  • However, the detrended Rydex Ratio (contrarian indicator) remains very bullish at -4.25 as the ETF traders are extremely leveraged short at a level seen only once in the past decade at the beginning of 2019. From that point the market rallied until March of 2020 when COVID arrived on the scene. As such, the Rydex/Insider dynamic remains very encouraging.
  • This week’s AAII Bear/Bull Ratio (contrarian indicator) remains very bullish, rising to 2.18 from 1.97.
  • The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remains a very bullish signal and near a decade peak of fear at 40.8/228.28. Only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms.
  • Everyone is on the bear side of the boat. We view that as very positive.
  • The forward 12-month consensus earnings estimate from Bloomberg for the SPX lifted to $236.06. As such, the SPX forward multiple is 17.4 with the “rule of 20” finding ballpark fair value at 17.1.
  • The SPX forward earnings yield is 5.76%.
  • The 10-year Treasury yield closed higher at 2.93%. We view new support as 2.67% and resistance at 2.93%.

In conclusion, the charts and data continue to suggest the last two months of decline now have the potential to improve with the “crowd” almost completely in disbelief. Their eventual shift out of extreme fear could prove powerful regarding potential upside.

SPX: 4,029/4,194 DJI: 31,975/33,358 COMPQX: 11,543/12,512 NDX: 1485/12,058

DJT: 13,790/14,515 MID: 2,419/2,550 RTY: 1,790/1,945 VALUA: 8,584/9,026

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