Indexes Need To Confirm They're Only At Market Correction Lows

Data Encouraging But Charts Need To Confirm

The major equity indexes closed lower Friday with negative internals and higher trading volumes on both the NYSE and NASDAQ. Most closed near the midpoints of their intraday ranges except the COMPQX and NDX that closed near their lows.

The result was all the index charts remain in near-term downtrends as negative market breadth persists. However, some of the data remains encouraging and at or near levels associated with market correction lows. While our shift to a “neutral/positive” macro-outlook appears premature, we remain of that opinion with the caveats that the charts need to confirm the data by violating near-term downtrend lines and resistance levels accompanied by an improvement in market breadth.

On the charts, all the major equity indexes closed lower Friday with negative internals on higher volume.

• While some of the drops were notable, we would stress that all support levels on the indexes held. No violations occurred.
• Nonetheless, all the indexes remain in near-term downtrends with only the NDX remaining above its 50 DMA.
• Cumulative market breadth continued to sag, leaving the All Exchange, NYSE and NASDAQ A/Ds negative and below their 50 DMAs.
• On the stochastic side of the picture, the DJT flashed a bullish crossover while the rest remain quite oversold.

Looking at the data, the McClellan 1-Day OB/OS Oscillators for the All Exchange and NASDAQ dropped back to very oversold levels with the NYSE just shy of that condition (All Exchange: -105.39 NYSE: -97.97 NASDAQ: -109.08). In fact, the NASDAQ 3-week OB/OS moving average is now at March 2020 levels. They still suggest potential for further strength, in our opinion.

• The % of SPX issues trading above their 50 DMAs dipped to 40% and remains neutral.
• The Open Insider Buy/Sell Ratio dipped as well to 69.3. However, the past several sessions have seen a generally consistent increase in insider buying activity as we have noted previously.
• The detrended Rydex Ratio (contrarian indicator) measuring the action of the leveraged ETF traders moved up fractionally to 1.09. It remains cautionary.
• Last week’s contrarian AAII Bear/Bull Ratio rose to 0.75, remaining neutral. The Investors Intelligence Bear/Bull Ratio (21.7/54.6) (contrary indicator) was still neutral although the number of bullish advisors declined.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg lifting to $215.82 for the SPX. As such, the SPX forward multiple is 21.0 with the “rule of 20” finding fair value at approximately 18.7.
• The SPX forward earnings yield is 4.76%.
• The 10-year Treasury yield dropped to 1.34 and below what we viewed as support. We view new support at 1.30% and resistance at 1.46%.

In conclusion, while Friday’s painful session suggests we were early in our more optimistic outlook of “neutral/positive” for the markets, chart support levels held while the data remains encouraging. However, we are now of the opinion that the charts and market cumulative breadth need to improve before becoming more optimistic.

SPX: 4,473/4,588 DJI: 33,856/35,006 COMPQX: 15,019/15,4720 NDX: 15,643/16,134

DJT: 14,924/15,492 MID: 2,621/2,776 RTY: 2,130/2,250 VALUA: 9,204/9,703

RTY chart courtesy of Bloomberg. All other charts, courtesy of Worden

SPX Daily Chart

DJI Daily Chart

NASDAQ Composite Daily Chart

NDX Daily Chart

DJT Daily Chart

MID Daily Chart

RTY Daily Chart