All the major equity indexes closed lower but managed to close well above their intraday lows that left their near-term support levels—that had been violated on an intraday basis—intact.
Nonetheless, all the charts remain in near-term downtrends and lacking technical evidence of imminent reversals to the positive. However, the counterbalancing data continues to suggest to us that some internal pressure is building for a rally that could prove notable, given the historically high levels of bearish sentiment that have usually presaged upside market moves.
This, while the SPX forward valuation is trading at a discount to fair value, something not seen in several months. As such, we are still sticking our neck out with our assumption that a turning tide based on sentiment and valuation is becoming more probable.
On the charts, all the major equity indexes closed lower Friday but well above their intraday lows due to significant buying in the last hour of trade. Importantly, in our opinion, the late day surge pushed all the charts back above support, all of which had been violated on an intraday basis.
We are of the opinion that the last hour of trade in the markets is telling as it is more rational in thought than early session action. However, all the indexes remain in near-term downtrends with no signs of reversal.
Cumulative market breadth was unchanged and neutral for the All Exchange, NYSE and NASDAQ. Some stochastic levels are oversold but no bullish crossovers have been generated thus far.
In contrast, we continue to believe the data is building upside pressure for the markets, especially regarding sentiment.
- The McClellan 1-Day OB/OS oscillators remain neutral (All Exchange: +6.37 NYSE: +0.56 NASDAQ: +10.15).
- The % of SPX issues trading above their 50 DMAs (contrarian indicator) dropped to 13% and remains bullish.
- The Open Insider Buy/Sell Ratio slipped slightly to 105.4 and neutral although the past several sessions have seen an increase in their buying activity.
- In sharp contrast, the detrended Rydex Ratio (contrarian indicator) remains very bullish at -3.03 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. So, the Rydex/Insider dynamic is very encouraging.
- Last week’s AAII Bear/Bull Ratio (contrarian indicator) is a very bullish 2.39 as well, staying near 20-year peak levels, also followed by rallies.
- The Investors Intelligence Bear/Bull Ratio (contrary indicator) remains a very bullish signal and at a decade peak of fear at 39.3/30.9. The crowd remains essentially entirely on the bear side of the boat that typically results in sizable up moves as sentiment eventually starts to shift.
- The forward 12-month consensus earnings estimate from Bloomberg for the SPX dipped to $234.75. As such, the SPX forward multiple remains at 16.6 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 6.02%.
- The 10-year Treasury yield closed lower at 2.79%. We view support as 2.5% and resistance at 3.2%.
SPX: 3,910/4,045 DJI: 31,137/32,000 COMPQX: 11,363/11,905 NDX: 11,810/12,496
DJT: 13,107/14,272 MID: 2,337/2,439 RTY: 1,755/1,855 VALUA: 8,378/8,551