Index Charts Remain Split

Forward Earnings Estimates Dip As 10-Year Yield Rises

The major equity indexes closed mixed Friday with negative internals on the NYSE and NASDAQ as trading volumes declined on both exchanges from the prior session. While the SPX managed to make some technical progress, the charts have not been able to surpass important resistance levels post the notable market drop last Monday. The near-term trends are still a mix of neutral and negative implications. And that condition exists while market breadth remains lackluster and, in our opinion, not very supportive. The data remains generally neutral in nature. However, the recent reductions in 12-month forward earnings estimates for the SPX combined with the lift in the 10-year Treasury yield add to the cautionary side of the scales, in our view. As such, we are maintaining our near-term “neutral/negative” macro-outlook for equities until such evidence is presented to warrant a change.

On the charts, the major equities closed mixed Friday with negative internals on the NYSE and NASDAQ as trading volumes declined on both from the prior session.

• On the plus side, The SPX (page 2) managed to close above near-term resistance and downtrend line turning its trend to neutral from negative. It joins the DJI(page 2), MID (page 4), RTY (page 5) and VALUA (page 5) in that condition.
• The COMPQX (page 3), NDX (page 3) and DJT (page 4) remain in near-term downtrends.
• Regarding market breadth Friday’s weak breadth left the cumulative advance/decline lines for the All Exchange NYSE and NASDAQ neutral and below their 50 DMAs.
• No stochastic signals were generated.

The data finds the McClellan 1-Day OB/OS Oscillators remaining neutral (All Exchange: +17.38 NYSE: +4.3 NASDAQ: +26.81).

• The Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders rose to 1.13 and bearish as the ETF traders increased their leveraged long exposure.
• The Open Insider Buy/Sell Ratio is neutral at 76.2 as insiders did some buying during the recent correction. However, it has not been updated in a couple of days.
• Last week’s contrarian AAII Bear/Bull Ratio (33.27/34.9) and Investors Intelligence Bear/Bull Ratio (22.1/50.0) (contrary indicator page 9) both saw a rise in bears and dip in bulls but remain neutral.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg dipping to $206.71 for the SPX. Said estimates have been gradually retreating over the past two weeks.
• As such, the SPX forward multiple is 21.6 with the “rule of 20” finding fair value at approximately18.5.
• The SPX forward earnings yield is 4.6%.
• The 10-year Treasury yield rose to 1.46%. We now suspect the 10-Year yield can approach the 1.5% level with support at 1.34%. As noted above, the decline in earnings estimates juxtaposed with the lift in the 10-Yeaar yield adds to our market concerns.

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In conclusion, the inability of the charts to violates important resistance levels post the recent shakeout combined with declining earnings and rising Treasury yields leaves us “neutral/negative” in our near-term outlook for equities.

SPX: 4,383/4,471

DJI: 34,226/34,814

COMPQX: 14,554/15,013

NDX: 14,836/15,379

DJT: 13,930/14,364

MID: 2,645/2,720

RTY: 2,210/2,280

VALUA: 9,361/9,642

Written By: Guy S. Ortmann, CMT