Charts & Some Sentiment Data Improve
The major equity indexes closed mostly higher yesterday with positive internals on the NYSE and NASDAQ as both indexes saw strong trading volumes. The charts saw several improvements including new closing highs and positive violations of trend. Meanwhile, there was some lessening of some of the cautionary sentiment signals while the majority of the data dashboard is now neutral. In our opinion, the primary point of concern now is valuation that remains extended. As such, the shift in the charts and data require us to follow our discipline and revise our recent move to a “neutral/negative” near-term outlook for the equity markets back to “neutral”. Were it not for valuation, we would be forced to be more constructive.
On the charts, all the major equity indexes closed higher yesterday except for the COMPQX (page 3) and NDX (page 3) posting losses.
- Internals were positive on the NSYE and NASDAQ on strong volume. Chart improvements were seen on the DJI (page 2), MID (page 4), RTY (page 5) and VALUA (page 5) as all posted new all-time closing highs.
- As well, the SPX (page 2) closed back above its near-term uptrend line and is now in a positive trend while the DJT (page 4) closed above resistance and is now neutral.
- So, the COMPQX, NDX and DJT are now in neutral trends with the rest positive.
- Market breadth remains positive as well with the cumulative advance/decline lines bullish for the All Exchange, NYSE and NASDAQ.
The data saw some improvements as well.
- The 1-day McClellan OB/OS Oscillators remain neutral (All Exchange: +6.68 NYSE: +5.51 NASDAQ: +7.72) despite yesterday’s surge.
- The psychology data saw the Open Insider Buy/Sell Ratio (page 9) dip to 33.8 but remains neutral.
- Of greater note, the leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator), saw the leveraged ETF traders decrease their leveraged long exposure to a neutral 0.87, relieving some of the excessive bullish sentiment concerns.
- However, this week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) was little changed at a bearish 20.8/62.4 while the AAII Bear/Bull Ratio also saw little change at 23.43/43.53.
- It is now the extended market valuation that is the greater concern. The forward 12-month consensus earnings estimate from Bloomberg rose to $166.10 resulting in a SPX forward multiple of 22.6 while the “rule of 20” finds fair value of 19.0.
- The SPX forward earnings yield is 4.4% with the 10-year Treasury yield rising to 1.04%.
In conclusion, the volatility of the markets over the past few sessions has been creating swings in the data and charts that have caused more frequent shifts in our outlook than normal. Nonetheless, the evidence presented yesterday suggests we move our outlook back to “neutral” from “neutral/negative”.
SPX: 3,695/NA
DJI: 30,209/NA
COMPQX: 12,580/12,950
NDX: 12,650/NA
DJT: 11,974/12,370
MID: 2,312/NA
RTY: 1,850/NA
VALUA: 7,825/NA