Down Session Leaves Index Charts Neutral

The major equity indexes closed mostly lower Monday. However, NYSE internals were positive while the NASDAQ saw only slightly negative breadth and positive up/down volume. As well, no support levels or trends were violated as all the index charts remain near-term neutral. Cumulative market breadth is neutral as well as is most of the data. We would note, however, investor bearish sentiment remains near historically high levels and as such, puts a positive thumb on the scale. Also, valuation, via the “rule of 20” still finds the SPX trading at a discount to ballpark fair value. Thus, we are becoming more encouraged regarding some near-term recovery in the markets. In particular, we would watch the COMPQX and NDX that appear to be in ascending triangle patterns that, should they have a positive resolution, would add to a more positive outlook.

On the charts, the major equity indexes closed mostly lower yesterday, giving up early session gains.

• Only the DJT and VALUA managed to post gains.
• Nonetheless, no violations pf support or trend were registered, leaving all in near-term neutral trends.
• The ascending triangle patterns on the NASDAQ Composite and NASDAQ 100, discussed yesterday, remain intact as well and could prove beneficial should they manage to violate resistance. We would also note the closer these patterns approach their apexes, theoretically the less powerful the resolution.
• Cumulative market breadth remains neutral for the All Exchange, NYSE, and NASDAQ as are all the stochastic readings.

The McClellan OB/OS Oscillators remain neutral (All Exchange: +21.34 NYSE: +24.28 NASDAQ: +19.818).

• The % of S&P 500 issues trading above their 50 DMAs (contrarian indicator) is neutral, dropping to 21%.
• The Open Insider Buy/Sell Ratio rose to 66.9, also stayed neutral.
• The detrended Rydex Ratio rose to -2.27 and is still very bullish as the leveraged ETF traders remain very leveraged short.
• This week’s AAII Bear/Bull Ratio saw the crowd staying very fearful, at 2.11 and very bullish.
• The Investors Intelligence Bear/Bull Ratio saw a rise in bulls and dip in bears but is still very bullish at 36.6/32.4. Three times in the past decade, such readings have marked market lows, most followed by notable rallies.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX dipped to $238.44. As such, the SPX forward multiple is 16.1 and at a discount to the “rule of 20” ballpark fair value at 17.0.
• The SPX forward earnings yield is 6.22%.
• The 10-year Treasury yield closed unchanged 2.96. We view support as 2.8% and resistance at 3.15%.

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In conclusion, we are getting more encouraged regarding near-term market prospects. Very intense investor fear combined with more appealing valuation as breadth improves while the COMPQX and NDX are seeing increasing demand on each subsequent decline, suggesting potential for a breakout on their part, still imply the scales are weighted for more progress over the near-term, in our opinion.

Written By: Guy S. Ortmann, CMT