Index Data Shoots A Glimmer Of Hope

Data Becomes More Encouraging Including McClellan OB/OS Oscillators

All the major equity indices closed lower Monday with broadly negative internals on the NYSE and NASDAQ as trading volumes declined from the prior session options expiration. However, some buying interest did show up near the close as all closed either near their midpoints of the session or near their highs.

On the other hand, all violated support with one exception, leaving all in near-term downtrends. Yet as dark as the session was, we are seeing some encouragement coming from the data dashboard.

All the 1-day McClellan OB/OS Oscillators are oversold again while investor sentiment that is a contrarian indicator is now largely bearish and suggesting some potential for relief. However, while the data is turning green, we need the charts and market breadth to improve to feel more confident that the lion’s share of the correction has been completed. The strong futures this morning need to hold through the close for that to occur.

On the charts, the major equity indexes closed lower Monday with negative internals on the NYSE and NASDAQ.

• Virtually every index closed below its near-term support except for the DJT. As such, the negative chart action left each index in a near-term downtrend at the close.
• Market breadth was broadly negative, leaving the cumulative advance/decline lines for the All Exchange, NYSE, and NASDAQ negative and below their 50 DMAs.
• Also, the DJI generated a bearish stochastic crossover signal.
• While we don’t want to overemphasize the fact that late session buying lifted the indexes to either the midpoints or highs of their respective intraday ranges, such action is of some encouragement.

Looking at the data, the McClellan 1-Day OB/OS Oscillators, all are now back in oversold territory (All Exchange: -63.4 NYSE: -72.87 NASDAQ: -57.95).

• The % of SPX issues trading above their 50 DMAs dipped to 39% and remains neutral.
• The Open Insider Buy/Sell Ratio rose slightly to 59.0, yet remains neutral.
• On the other hand, the detrended Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, continued dropping to 0.75. While staying neutral, the fact that insiders are nibbling while the ETF traders head for the exits is also a slight positive, in our opinion.
• This week’s contrarian AAII Bear/Bull Ratio rose to 1.38 as the crowd became more nervous and continues its bullish implications. Bears now widely outnumber bulls. The Investors Intelligence Bear/Bull Ratio (25.3/39.8) (contrary indicator) is still neutral, but the number of bearish advisors rose significantly to 44.2% versus its prior 25.3% level. So, the sentiment indicators are more encouraging as well.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg rising to $216.18 for the SPX. As such, the SPX forward multiple dropped to 21.1 with the “rule of 20” still finding fair value at approximately 18.6.
• The SPX forward earnings yield is 4.73%.
• The 10-year Treasury yield rose to 1.42%. We view support at 1.38% and resistance at 1.58%.

In conclusion, while the data offers hope of nearing the completion of a correction, the charts and market breadth have yet to confirm. Nonetheless, we remain near-term “neutral/positive” in our macro-outlook for equities.

SPX: 4,527/4,617 DJI: 34,592/35,993 COMPQX: 14,827/15,315 NDX: 15,526/15,911

DJT: 15,484/16,277 MID: 2,646/2,750 RTY: 2,120/2,220 VALUA: 9,278/9,623