Some Index Charts Turn Neutral From Bullish

Cumulative Market Breadth Sees Some Deterioration

The major equity indexes closed lower Wednesday with negative internals on the NYSE and NASDAQ as NYSE volumes rose and NASDAQ volumes dipped from the prior session. Most closed at or near their lows of the day as no late session buying was presented.

The charts saw five of the indexes violate their near-term uptrend lines, and are now neutral, while also generating bearish stochastic crossover signals. The data saw some slight changes but none that would be considered significant, in our opinion. So, while the futures are indicating a strong open this morning, we are not quite convinced the current correction has been completed. As such, we are maintaining our near-term macro-outlook for equities at “neutral.”

On the charts, all the major equity indexes closed lower yesterday with negative internals on the NYSE and NASDAQ.

• Most closed near their intraday lows.
• The SPX, DJI, COMPQX, NDX, and RTY closed below their near-term uptrend lines that shifted their trends to neutral from positive.
• As well, all five generated bearish stochastic crossover signals.
• The MID, DJT and VALUA remain in uptrends.
• Market breadth took a hit as the cumulative advance/decline lines for the All Exchange and NASDAQ turned neutral from positive while the NYSE’s stayed positive.

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The data finds the McClellan 1-Day OB/OS still in neutral territory despite the weakness (All Exchange: -6.91 NYSE: -4.91 NASDAQ: -8.97).

• The detrended Rydex Ratio (contrarian indicator) measuring the action of the leveraged ETF traders dipped to 1.39 and remains in bearish territory as they remain extended in their leveraged long exposure.
• The Open Insider Buy/Sell Ratio rose slightly to 25.5 and just inside the neutral range, but only marginally so. This level is not indicative of a strong buying appetite on their part.
• As we have stated in the past, when insiders are selling as the ETF traders continue to be leveraged long, the insiders typically are on the right side of the trade.
• This week’s contrarian AAII Bear/Bull Ratio (27.73/42.73) remained neutral with the increase in bulls as did The Investors Intelligence Bear/Bull Ratio (24.1/54.0) (contrary indicator).
• Valuation finds the forward 12-month consensus earnings estimate from Bloomberg lifting to $214.32 for the SPX. As such, the SPX forward multiple is 21.7 with the “rule of 20” finding fair value at approximately 18.4.
• The SPX forward earnings yield is 4.61%.
• The 10-year Treasury yield closed higher and above resistance at 1.56%. We view new resistance at 1.6% and support at 1.53%.

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In conclusion, yesterday’s action was not unexpected as the charts and data had been signaling a potential for some consolidation. And while the futures indicate a strong open, we are not yet convinced said consolidation is complete. Today’s close may shed some light as to whether or not we are out of the woods. We remain near-term “neutral” in our macro-outlook for equities.

SPX: 4,620/NA DJI: 35,904/NA COMPQX: 15,598/NA NDX: 15,975/NA

DJT: 16,000/17,000 MID: 2,852/NA RTY: 2,350/NA VALUA: 9,937/NA

All charts courtesy of Worden

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Written By: Guy S. Ortmann, CMT