Indexes' Chart Trends Remain Negative; No Technicals Of An Upside Reversal Yet

Investor Sentiment Still At Historically High Levels of Fear

The major equity indexes closed lower Tuesday with the one exception of the DJI posting a minor gain. Market internals were negative on the NYSE and NASDAQ as trading volumes rose on both.

Two of the indexes violated their support levels as the near-term downtrends for all the indexes remain intact and lacking signs of reversal. While the charts remain negative, the data is generally neutral except for investor sentiment (contrarian indicators) that continue to reveal historically high levels of fear that, over the past two decades, have been associated with market bottoms followed by rallies.

Nonetheless, while medium to long term investors may find prices attractive, we have yet to see enough of a shift in the evidence to suggest the recent market slide has been completed and offering short-term tradable strength.

On the charts, only the DJI managed to post a gain yesterday as the rest declined, leaving all in near-term downtrends that have yet to show technical signs of an upside reversal.

And while the near-term downtrends should, in our opinion, be respected until suggesting otherwise, the cumulative breadth for the NASDAQ saw its A/D line turn negative from neutral with the All Exchange and NYSE staying neutral. No stochastic signals were generated.

Regarding the data, the McClellan 1-Day OB/OS oscillators remain neutral (All Exchange: +13.72 NYSE: +27.51 NASDAQ: +3.47).

• The % of SPX issues trading above their 50 DMAs (contrarian indicator) rose to 21% but remains bullish.
• The Open Insider Buy/Sell Ratio slipped to 92.6 as insiders recently backed off from their prior buying activity.
• In sharp contrast, the detrended Rydex Ratio (contrarian indicator) remains very bullish at -2.97 as the leveraged ETF traders are leveraged short at historically high levels. Its chart shows only five times in the past decade have the ETF traders been so heavily leveraged short, all of which were followed by rallies. As such, the Rydex/Insider dynamic remains encouraging.
• This week’s AAII Bear/Bull Ratio (contrarian indicator) remains very bullish 1.97, dropping from 2.39.
• The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remains a very bullish signal and at a decade peak of fear at 43.0/27.8. Only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX lifted to $234.83. As such, the SPX forward multiple remains at 16.8 and at a discount to the “rule of 20” finding ballpark fair value at 17.2. Said discount has not been seen in the markets for several months.
• The SPX forward earnings yield is 5.96%.
• The 10-year Treasury yield closed lower at 2.76%. We view support as 2.5% and resistance at 3.2%.

In conclusion, the near-term outlook has yet to show signs of shifting out of its current downtrends. However, sentiment and valuation suggest some buying opportunities for those with medium to longer investment time horizons.

SPX: 3,910/4,045 DJI: 31,137/32,000 COMPQX: 11,037/11,563 NDX: 11,485/12,058

DJT: 13,107/14,272 MID: 2,337/2,439 RTY: 1,755/1,855 VALUA: 8,378/8,551