Market Breadth Improves
All of the indexes closed higher Wednesday with positive internals on the NYSE and NASAQ although volumes declined from those of the prior session. One index managed to close above its short term downtrend line as the rest remain negative. However, overall market breadth has improved while valuation has moderated and the data remains largely neutral. As such, we feel it appropriate to shift our near term outlook for the major equity indexes from “neutral/negative” to “neutral”.
On the charts, all of the indexes closed higher yesterday with positive internals as trading volumes declined from the prior session.
- All closed near their intraday highs.
- The NDX (page 4) did manage to close above its short term downtrend line, turning said trend neutral.
- As of this point, the rest of the indexes remain in negative technical short term downtrends with all still trading below their 50 DMAs.
- On a positive note, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ improved to the point where they are now neutral versus their prior negative trends while also moving back above their 50 DMAs. We believe the A/Ds to be an important factor regarding our shift in opinion.
The data is neutral.
- The 1 day McClellan OB/OS Oscillators remain neutral, in spite of the recent 50 point gain on the SPX (All Exchange:-22.58 NYSE:-22.91 NASDAQ:-22.49).
- The detrended Rydex Ratio (0.02), Open Insider Buy/Sell Ratio (61.6) and % of SPX stocks above their 50 DMAs (43.2) are all neutral as well.
- However, sentiment remains mostly cautionary with the AAII Berar/Bull Ratio showing the crowd slightly overly bullish at 21.33/38.33 while the Investors Intelligence Bear/Bull Ratio (contrary vindicator) negative at 17.8/55.5.
- Another contributing factor in our outlook shift is the improvement in valuation. The 12 month forward consensus earnings estimate from Bloomberg for the SPX stands at $171.54, leaving the forward p/e at a 16.6 multiple while the “rule of twenty” finds fair value at 17.6, easing our prior valuation concerns when the SPX was trading at fair value a few weeks ago. The earnings yield stands at 6.02%.
In conclusion, while the bulk of the index charts remain short term negative and bothersome, the neutral state of the data, improvement in market breadth and valuation are just enough to push us over the line to a “neutral” near term outlook from our previous “neutral/negative” view.
- SPX: 2,798/2,861
- DJI: 25,252/25,922
- Nasdaq: 7,638/7,903
- NDX: 7,306/7,571
- DJT: 10,284/10,610
- MID: 1,876/1,933
- Russell: 1,518//1,561
- VALUA: 6,048/6,254