Consolidation Continues As Some Supports Fail

Market Breadth Weakens

The major equity indexes closed lower Tuesday with negative internals on the NYSE and NASDAQ as trading volumes rose from the prior session. All closed at or near their intraday lows as several of the indexes closed below their near-term support levels as the consolidation of the March gains continued.

Yet, the damage still left the indexes in near-term neutral trends. The McClellan 1-day OB/OS Oscillators that were on warning signals yesterday have retreated to neutral levels as is the balance of the data inputs except for contrarian crowd sentiment that still registers very high levels of fear present.

With the futures indicating a negative open, the near-term consolidation of the sizable March gains that we had been expecting appears not to have been completed just yet.

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On the charts, all the major equity indexes closed lower yesterday with negative internals on the NYSE and NASDAQ on higher trading volumes. All closed at or near their intraday lows with the DJI, DJT, MID, RTY, and VALUA closing below their respective support levels. However, the near-term trends, in our opinion, remain neutral as the consolidations of the March gains progressed.

Unfortunately, market breadth weakened with the cumulative advance/decline lines for the All Exchange and NYSE slipping to neutral as they joined the NASDAQ in that regard. There were no stochastic signals generated. We would note, however, the DJT that has been hammered over the past few sessions is now very oversold but not yet yielding a bullish crossover signal.

The data now finds the McClellan 1-Day OB/OS dropping back to neutral from yesterday’s warning levels (All Exchange:  +14.63 NYSE: +10.88 NASDAQ: +18.58).

• The % of SPX issues trading above their 50 DMAs (contrarian indicator) dropped to 58%, remaining neutral. The Open Insider Buy/Sell Ratio declined to 41.3, also staying neutral.
• The detrended Rydex Ratio (contrarian indicator) lifted to +0.48 and remains neutral versus its prior bullish implications near the March lows.
• This week’s AAII Bear/Bull Ratio (contrarian indicator) slipped to 1.29 as the crowd became a bit less cautious, dropping its forecast to bullish from very bullish. Meanwhile the Investors Intelligence Bear/Bull Ratio (contrary indicator) is now 34.1/37.7 remaining very bullish, staying near peak fear levels seen 4 times over the past decade.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX lifted further to $234.28. As such, the SPX forward multiple stands at 19.3 with the "rule of 20" finding ballpark fair value at 17.4.
• The SPX forward earnings yield is now 5.18%.
• The 10-year Treasury yield closed notably higher at 2.56. We view resistance as 2.64% while support remains at 2.0%.

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In conclusion, the expected consolidation of March’s gains appears to be ongoing and lacking signals, other than extreme crowd bearish sentiment. We continue to look for implications that said consolidation has been completed, but that is not the case currently.

SPX: 4,516/4,600  DJI: 34,546/35,040   COMPQX: 14,202/14,938  NDX: 14,642/15,358                         

DJT: 15,024/15,455  MID: 2,643/2,711  RTY: 2,015/2,060     VALUA: 9,493/9,663

Written By: Guy S. Ortmann, CMT