Selling Pressure And Breadth Weakness Continue

Data Still Not Showing Bottoming Signals

All the major equity indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as trading volumes declined from the prior session. Once again, we saw early session strength disappear throughout the session with all the indexes closing at or near their intraday lows. The charts saw a few technical negative events registered while cumulative market breadth continued to deteriorate as the A/Ds made lower lows. Meanwhile, the data dashboard has yet to present levels typically associated with correction bottoms as, for example, the 1-Day McClellan OB/OS Oscillators remain neutral and not yet in oversold territory. As such, while we are formally maintaining our near-term “neutral” macro-outlook for equities, the charts and data, in our opinion, suggest the potential for some further weakness.

On the charts, all the major equity indexes closed lower yesterday with negative internals on lighter volume.

• All closed at or near their intraday lows as the strong open diminished throughout the session, once again.
• Two technical events of note were generated. The DJI (page 2) closed below its intermediate term uptrend line that had been intact from the beginning of last March. Theoretically, the longer a trend is in place, the greater the significance when it is violated. It is now close to its long-term uptrend line from last November.
• As well, the VALUA (page 5) closed back below its 50 DMA.
• We have the near-term trends unchanged with the SPX (page 2), COMPQX (page 3), NDX (page 3) and DJT (page 4) neutral and the rest negative.
• Market breadth weakened further as the NYSE cumulative A/D turned negative and below its 50 DMA as are the VALAU and NASDAQ A/Ds. Of note, all made lower lows within a weakening structure.
• Several stochastic levels are oversold, some in the single digits, but no bullish crossovers have been generated.

The data finds the McClellan 1-Day OB/OS Oscillators still in neutral territory (All Exchange: -38.82 NYSE: -40.21 NASDAQ: -39.29). They have yet to enter oversold territory.

• The Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders dipped slightly to 1.2 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.
• This week’s contrarian AAII Bear/Bull Ratio and Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) were little changed. The AAII remained neutral (31.17/40.63) while the II turned neutral from bearish at 21.1/52.6.
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg rose to $207.54 for the SPX. As such, the SPX forward multiple is 21.4 with the “rule of 20” finding fair value at approximately18.7.
• The SPX forward earnings yield is 4.67%.
• The 10-year Treasury yield dipped to 1.28% but remains within its current trading range with resistance at 1.4% and support at 1.23%.

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In conclusion, while we remain “neutral” in our near-term outlook for equities, the charts and data suggest the potential for some further erosion. Importantly, we believe “sell signals” on individual names should be honored.

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: 2,673/2,737

RTY: 2,200/2,225

VALUA: 9,388/9,670

Written By: Guy S. Ortmann, CMT