Charts And Breadth See Some Improvement

10-Year Treasury Yield Breaks Above Resistance

The major equity indexes closed mostly higher Thursday with positive internals on the NYSE Composite and NASDAQ as trading volumes declined from the prior session on both exchanges. The charts did see some technical improvements in the form of violations of resistance and one violation of a downtrend. Market breadth finally saw some improvement as well. Meanwhile, the data continues to send a generally neutral message. However, the 10-Year Treasury yield closed above what we viewed as near-term resistance, suggesting higher yields forthcoming that could weigh on the equity markets. So, while yesterday’s improvements are welcome, they fell a bit short of levels that would prompt us to change our current near-term “neutral/negative” macro-outlook for equities.

On the charts, the only index to post a loss yesterday was the DJT (page 4). All others posted gains with positive internals on the NYSE and NASDAQ on lighter trading volumes.

• Some of the charts saw technical improvements with the SPX (page 2), DJI (page 2) and MID (page 4) closing above their resistance levels.
• As well, the SPX and RTY (page 5) closed above their near-term downtrend lines and are now in neutral trends as are all the rest with the exceptions of the COMPQX (page 3) and NDX (page 3) that remain near-term negative despite their gains.
• Market breadth saw improvement as well with the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ turning neutral from negative but staying below their 50 DMAs.
• No stochastic signals were generated.

The data finds the McClellan 1-Day OB/OS Oscillators remaining neutral (All Exchange: +19.32 NYSE: +25.79 NASDAQ: +15.2).

• The detrended Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders slipped further to 0.44, one of the lowest levels of the past several months as their bullish expectations have waned from their excesses at the market’s highs. As a contrarian indicator, it is an improvement within the psychology data.
• The Open Insider Buy/Sell Ratio is still neutral, dipping to 33.6.
• This week’s contrarian AAII Bear/Bull Ratio (39.73/26.8) turned mildly bullish as bearish sentiment increased while the bulls waned. That “crowd” is now nervous. The Investors Intelligence Bear/Bull Ratio (22.1/46.5) (contrary indicator page 9) was little changed and remains neutral.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg lifting to $213.34 for the SPX. As such, the SPX forward multiple is 20.6 with the “rule of 20” finding fair value dipping to approximately 18.4.
• The SPX forward earnings yield is 4.85%.
• Of note, the 10-year Treasury yield rose to 1.57% and above our 1.55% resistance level. It suggests higher rates forthcoming that could become an issue for equities, in our opinion. We see new resistance now at 1.62% and support at 1.46%.

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In conclusion, yesterday’s trading helped the charts and market breadth part some of the clouds we saw overhanging the markets. Yet, we are not yet of the opinion that they were sufficient to change our near-term “neutral/negative” macro-outlook for equities.

SPX: 4,300/4,427

DJI: 33,914/34,951

COMPQX: 14,292/14,670

NDX: 14,509/14,920

DJT: 13,976/14,560

MID: 2,624/2,723

RTY: 2,200/2,280

VALUA: 9,361/9,590

Written By: Guy S. Ortmann, CMT