NASDAQ Above Intermediate Downtrend

Data Mixed as Sentiment Suggests Upside

All the major equity indexes closed higher Thursday with positive internals on the NYSE and Nasdaq as trading volumes declined on both from the prior session. The day’s market breadth was strong as all the indexes closed at or near their intraday highs. Importantly, in our opinion, two of the indexes not only closed above resistance but also violated their intermediate term downtrend lines, although their near-term trends remain neutral.

The data is a bit mixed. However, investor sentiment is so bearish that, as a contrarian indicator, implies potential for further upside. And while the SPX still trades at a slight discount on a forward 12-month valuation basis, we are getting more encouraged regarding improving market prospects. We are now more comfortable with the idea of buying near support levels as some near-term profit taking would not be unusual.

On the charts, the major equity indexes closed higher yesterday with positive internals on lighter trading volume.

• All closed near their session highs with the NASDAQ Composite and Nasdaq 100 managing to close above resistance as well as their intermediate term downtrend lines that have been in effect since the end of March. While their near -term trends remain neutral, as do all the others, the violation of the intermediate term trend is of some technical import, in our opinion. Technical theory suggests the longer a trend is in place, the more important a violation of said trend is when it occurs.
• Cumulative market breadth remains neutral for the All Exchange, NYSE and Nasdaq as are the stochastic readings on the indexes.

The McClellan OB/OS Oscillators are now slightly overbought for the All Exchange and Nasdaq while the NYSE’s remains neutral (All Exchange: +51.78 NYSE: +48.26 Nasdaq: +55.04).

• The % of SPX issues trading above their 50 DMAs rose to 28%, staying neutral.
• The Open Insider Buy/Sell Ratio dipped slightly to 70.9, also staying neutral.
• However, the detrended Rydex Ratio dropped further to -2.36 and on a very bullish signal as the typically wrong leveraged ETF traders increased their already heavily short exposure.
• This week’s AAII Bear/Bull Ratio (contrarian indicator) saw the crowd staying very fearful, at 2.72 and very bullish.
• The Investors Intelligence Bear/Bull Ratio saw a rise in bulls and drop in bears but is also very bullish at 40.0/32.9. 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 slipped to $239.66. As such, the SPX forward multiple is 16.3 versus the “rule of 20” ballpark fair value at 17.0.
• The SPX forward earnings yield is 6.14%.
• The 10-year Treasury yield closed higher at 3.01% and slightly above resistance. We view support as 2.8% and new resistance at 3.03%.

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In conclusion, while we do not expect the markets to go up in a straight line from here as volatility remains an issue, the chart improvements combined with sentiment and valuation at a slight discount suggest further improvements are becoming more probable.

Written By: Guy S. Ortmann, CMT