Some Psychology Turns Bullish
The major equity indexes closed mixed Monday with positive internals on the NYSE and NASDAQ as trading volumes rose on the NASDAQ from the prior session while those on the NYSE declined. Three of the indexes closed below support. However, yesterday’s internals combined with some of the data, including psychology, have prompted us to shift our near term outlook from “neutral/negative” to “neutral”.
On the charts, the indexes closed mixed yesterday with the SPX (page 2), COMPQX (page 3) and NDX closing lower on the day as well as below their respective support levels while the rest of the indexes posted gains.
- One point that caught our attention was that although the three indexes noted closed lower, the action took place with positive internals, suggesting a narrower group of stocks suffering damage.
- We would also note the DJI (page 2) formed a “doji” candlestick pattern where it closed at the midpoint of a broad intraday range. It suggests that the preceding decline may be getting ready to shift.
- While all of the indexes remain in technical downtrends and below their 50 DMAs as are the cumulative advance/decline lines, the stochastic levels are oversold to the point of being in single digits. No “bullish crossovers” have been generated at this point.
The data has improved slightly.
- The 1 day McClellan OB/OS Oscillators are still oversold (All Exchange:-62.45 NYSE:-55.82 NASDAQ:-72.58). The detrended Rydex Ratio (-0.66) is close to turning bullish while the Open Insider Buy/Sell Ratio (92.2) is neutral but showing an uptick in buying activity.
- The % of SPX stocks above their 50 DMAs (29.1) is also neutral.
- Psychology has improved with the new AAII Bear/;’Bull Ratio (contrary indicator) turning bullish at 38.33/25.67 as the crowd is finally tossing in the towel. However, the Investors Intelligence Bear/Bull Ratio (contrary indicator) remains negative at 17.3/49.0 suggesting advisors are overly bullish.
- The 12 month forward consensus earnings estimate from Bloomberg for the SPX dipped to $171.17, leaving the forward p/e at a 16.0 multiple while the “rule of twenty” finds fair value at 17.9 suggesting the SPX is undervalued. Of course, that is based on the assumption that said estimates will hold. The shift in valuation has largely been due to the notable drop in the 10 Year Treasury yield to 2.08%. The earnings yield stands at 6.24%.
In conclusion, yesterday’s internals combined with the OB/OS, AAII data suggest we may see a near term reprieve from recent selling pressure causing us to turn “neutral” in our near term outlook.