Several Indicators Suggest Bottom
All of the indexes closed significantly lower yesterday with broadly negative internals as volumes rose notably from the prior session. All of the index charts sliced below support levels in what looks to us to be a selling panic. However, while we were not expecting such significant declines, we are now of the opinion that said panic is nearing completion based on multiple issues discussed below, including valuation. As such, we are sticking our necks out, turning our near term outlook to “neutral/positive” from “neutral”.
- On the charts, all of the indexes saw sizable losses yesterday as all closed well below what we thought were near term support levels. So, all of the indexes are now below their 50 DMAs and in near term downtrends. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain negative as well. So why are we more encouraged? Simply put, on the charts, all of the indexes are just shy of high volume support levels that we suspect will hold given the fact that the large recent losses have washed out a lot of supply with prices significantly more attractive than just a few days ago. One metric in that regard is the % SPX stocks trading above their 50 DMAs has shrunk to only 22.8%. This is the same level registered at the market lows last January and March that were subsequently followed by strength and marked market bottoms. And while the stochastic levels have yet to give bullish crossover signals, all are deeply oversold with several in the single digits.
- The data suggests relief as well, All of the McClellan OB/OS Oscillators are oversold with the 1 day readings extremely so that imply at least a pause or bounce (All Exchange:-124.63/-74.74 NYSE:-121.96/-67.43 NASDAQ:-130.39/-83.36). The Equity (0.74), Total (1.22 and OEX (1.0) are al bullish while insiders continue to mop up stock from sellers with a bullish 91.4 Open Insider Buy/Sell ratio. As well, we now find valuation below implied fair value with the forward 12 month earnings estimates for the SPX via Bloomberg at $172.58 leaving the forward 12-month p/e for the SPX at 16.1 versus the “rule of 20” implied fair value of a 16.8 multiple. The “earnings yield” stands at 6.2%.
- In conclusion, while the crowd is crushing itself at the exits, valuation has become more reasonable with multiple indicators that have historically been associated with marking near term bottoms flashing those bottom signals. As such we are changing our near term outlook to “neutral/positive” from “neutral”.
- : 2,740/2,800
- : 25,348/25,572
- : 7,268//7,729
- : 6,947/7,200
- : 10,425/10,985
- : 1,896/1,969
- VALUA: 6,112/6,328