S&P MidCap 400, Russell 2000 Futures, And Value Line Charts Turn Bullish

McClellan OB/OS Oscillators Overbought As Sentiment Moderates, But Is Still Bullish

All the major equity indexes closed higher Tuesday with positive internals on the NYSE and NASDAQ as trading volumes declined on both exchanges from the prior session.

All closed at or near their intraday highs after recovering from a weak open as bulls took control. The charts saw several positive technical events generated, including three violating resistance, thus turning their near-term trends to bullish from neutral.

Others saw “bullish engulfing patterns” described below. So, the charts are evenly split between near-term neutral and bullish while market breadth remains supportive.

The data is mixed with the McClellan OB/OS oscillators overbought while the level of crowd fear has moderated but remains on a bullish signal. In our opinion, the charts and data are likely suggesting the worst of the damage may be complete with buying weakness near support may now be appropriate.

On the charts, all the major equity indexes closed higher yesterday with positive internals on lower volume. The weak open saw buyers step in to take control of the session that, at the close, found the MID, RTY, and VALUA all closing above resistance as well as their 50 DMAs, joining the NDX in near-term uptrends.The rest remain neutral.

As well, the SPX and DJI yielded “bullish engulfing patterns” that are generated when a stock or index opens below and closes above the prior day’s open and close.

Market breadth is supportive as the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive. Stochastic levels are overbought but have not yet given bearish crossover signals.

The McClellan 1-Day OB/OS oscillators remain overbought (All Exchange: +83.01 NYSE: +90.75 NASDAQ: +77.46).

• The % of SPX issues trading above their 50 DMAs (contrarian indicator) rose to 46%, staying neutral.
• The Open Insider Buy/Sell Ratio declined to 45.5, also staying neutral.
• The detrended Rydex Ratio (contrarian indicator) rose to -1.88 from -4.16 a few days ago but remains in bullish territory as the leveraged ETF traders are still leveraged short.
• This week’s AAII Bear/Bull Ratio (contrarian indicator) remains very bullish at 1.81, although a bit less so versus last week’s 2.18 reading.
• The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remained on a very bullish signal and still near a decade peak of fear. However, we would note bears declined as bulls increased to 38.0/36.2. Only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX rose to $236.47. As such, the SPX forward multiple rose to 17.6 with the “rule of 20” finding ballpark fair value at 17.0.
• The SPX forward earnings yield is 5.68%.
• The 10-year Treasury yield closed lower at 2.97%. We view support as 2.89% and resistance at 3.07%.

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In conclusion, the chart improvements, good market breadth, while the level of crowd fear has declined but remains high as valuation has been compressed suggest buying weakness near support may prove profitable.

SPX: 4,029/4,194 DJI: 31,975/33,358 COMPQX: 11,543/12,512 NDX: 1485/12,058

DJT: 13,790/14,515 MID: 2,464/2,580 RTY: 1,850/1,945 VALUA: 8,742/9,100

Written By: Guy S. Ortmann, CMT