Charts And Breadth Weaken Further

McClellan 1-Day OB/OS Oscillators Still Neutral

All the major equity indexes closed lower Friday with negative internals on the NYSE and NASDAQ as NYSE volumes dipped and NASDAQ volumes rose from the prior session. All closed at or near their intraday lows as the early session strength evaporated.

The charts saw further deterioration with several violations of support as some near-term trends turned negative. As well, market breadth weakened further, leaving all the cumulative advance/decline lines in downtrends.

Regarding the data, we are not seeing any indications at this point suggesting the current correction has climaxed as the McClellan 1-day OB/OS Oscillators remain neutral while other data points have yet to reverse their cautionary signals. So, although the futures again indicate a strong open, as they did on Friday, they suggest an open near important resistance levels that would need to be violated in order to alter our current near-term “neutral” macro-outlook for equities.

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On the charts, all the major equity indexes closed lower Friday with negative internals on the NYSE and NASDAQ with all closing at or near their intraday lows.

• The charts weakened further with the DJI, MID, RTY, and VALUA all closing below their near-term support levels and are now in bearish near-term trends.
• As well, the MID and VALUA closed below their 50 DMAs.
• So, we find the DJI, MID, RTY and VALUA near-term negative with the rest neutral.
• The COMPQX and NDX generated bearish stochastic crossovers. Recent weakness in the other indexes was presaged by similar signals.
• Breadth weakened further with the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ turning negative and below their 50 DMAs.

The data finds the McClellan 1-Day OB/OS Oscillators still in neutral territory, lacking oversold signals (All Exchange: -24.19 NYSE: -36.41 NASDAQ: -16.45).

• The Rydex Ratio (contrarian indicator) measuring the action of the leveraged ETF traders dipped slightly to 1.21 but still finds the ETF traders heavily leveraged long and on a bearish signal.
• The Open Insider Buy/Sell Ratio was unchanged at 23.7 and remains bearish. They have yet to see price as attractive enough for purchase.
• Last week’s contrarian AAII Bear/Bull Ratio and Investors Intelligence Bear/Bull Ratio (contrary indicator) both saw an increase in bears and bulls with the AAII remaining neutral (33.8/38.73) and the II bearish at 21.3/52.1.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg dipping to $207.54 for the SPX. As such, the SPX forward multiple is 21.5 with the “rule of 20” finding fair value at approximately 18.7.
• The SPX forward earnings yield is 4.65%.
• The 10-year Treasury yield rose to 1.34% but remains within its current trading range with resistance at 1.4% and support at 1.23%.

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In conclusion, Friday’s failed rally attempt combined with the deterioration of the charts and lack of data encouragement suggest we maintain our “neutral” macro-equity outlook despite the strong futures this morning. We believe more patience may be required to become more optimistic.

SPX: 4,440/4,535 DJI: 34,352/34,953 COMPQX: 14,890/15,379 NDX: 15,265/15,690

DJT: 14,239/14,732 MID: 2,676/2,737 RTY: 2,200/2,280 VALUA: 9,388/9,670

All charts courtesy of Worden

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Written By: Guy S. Ortmann, CMT