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Near-Term Negative Outlook For Equity Markets Intact. Here's Why

By Guy S. Ortmann, CMTStock MarketsSep 23, 2020 09:59AM ET
www.investing.com/analysis/nyse-still-appears-oversold-according-to-these-indicators-200538626
Near-Term Negative Outlook For Equity Markets Intact. Here's Why
By Guy S. Ortmann, CMT   |  Sep 23, 2020 09:59AM ET
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  • Bounce Results In Minor Impact
  • Some McClellan 1-Day OB/OS Remain Oversold

The major equity indexes closed higher Tuesday with positive internals on the NYSE and NASDAQ as trading volumes declined on both exchanges from then prior session. The charts saw two of the indexes close above their near-term downtrend lines and are now neutral while no other technical events of import were generated. The data remains mixed between bullish and bearish signals while investment advisor sentiment and valuation remain cautionary. So, while the markets saw some positive action yesterday, in our view it was not sufficient to alter our current “negative” near-term outlook for the equity markets as a whole.

On the charts, all the equity indexes closed higher yesterday with positive internals although trading volumes were well below the prior negative session.

  • The only chart events of import were the COMPQX (page 3) and NDX (page 3) closing above their near-term downtrend lines, resulting in their trends turning neutral.
  • The rest remain negative except for the DJT (page 4) staying positive.
  • We would also note the majority of the indexes now have substantial levels of overhanging supply that could prove to be difficult to overcome.
  • As well, the cumulative advance/decline lines remain negative and below their 50 DMAs for the All Exchange, NYSE and NASDAQ suggesting a weak foundation for the markets currently exists.

The data remains mixed.

  • The 1-day McClellan OB/OS Oscillators remain oversold on the All Exchange and NYSE but neutral on the NASDAQ after suggesting a pause/bounce from the recent weakness yesterday (All Exchange: -51.9 NYSE: -67.0 NASDAQ: -39.43).
  • The Open Insider Buy/Sell Ratio (page 9) is neutral, dropping to 40.4 while the detrended Rydex Ratio (contrary indicator page 8) remains neutral at -0.19 with the leveraged ETF traders remaining somewhat evenly balanced in their long/short exposure.
  • This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) continues its bearish signal at 18.36/54.8 that may be the beginning of an important sentiment shift as recently discussed in these notes.
  • The counterintuitive % of SPX issues trading above their 50 DMAs is neutral at 36.8%.
  • The valuation gap remains extended, in our opinion, with the SPX forward multiple lifting to 22.7 via consensus forward 12-month earnings estimates from Bloomberg of $146.16 while the “rule of 20” finds fair value at 19.3.
  • The SPX forward earnings yield is 4.41% with the 10-year Treasury yield at 0.66%.

In conclusion, while yesterday’s OB/OS levels suggested the bounce that occurred and still implies some slight positive action, the charts remain largely problematic while valuation and advisor sentiment are waving yellow flags. Thus, we are keeping our near-term “negative” outlook for the equity markets intact.

SPX: 3,271/3,386 DJI: 26,747/27,786 COMPQX: 10,738/11,232

NDX: 10,756/11,375 DJT: 11,114/11,526 MID: 1,780/1,899

RTY: 1,470/1,595 VALUA: 6,136/6,375

Near-Term Negative Outlook For Equity Markets Intact. Here's Why
 

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Near-Term Negative Outlook For Equity Markets Intact. Here's Why

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