Maintaining Near-Term Neutral Outlook

McClellan 1-Day OB/OS Turn Neutral

All the major equity indexes closed lower Tuesday with negative internals on the NYSE and NASDAQ as trading volumes rose on both exchanges from the prior session. All the indexes closed at or near their intraday lows with some technical weakness registered on some of the large cap indexes. However, all support levels held which we view as encouraging, given the news that spurred the reversal.

Market breadth remains positive while the data is generally neutral. And while valuation still appears extended, it is less so as discussed in our most recent comments. As such, we are maintaining our near-term “neutral/positive” outlook for the equity markets at this time.

On the charts, the indexes closed lower yesterday with negative internals on heavier trading volume as selling pressure entered the market in the latter part of the session.

• All closed near their intraday lows.
• Some technical damage was registered on the SPX (page 2), COMPQX (page 3) and NDX (page 3) as all closed below their short-term uptrend lines and are now neutral.
• As well, the SPX and NDX closed below their 50 DMAs.
• In our opinion, this was largely the result of the declines in the FAANG components.
• However, we think it important that no support levels were violated on any of the charts.
• As such, the SPX, COMPQX and NDX are now neutral with the rest remaining in positive trends.
• And while breadth was negative yesterday, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain near-term positive and above their intermediate-term downtrend lines.

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The data remains mixed.

• The 1-day McClellan OB/OS Oscillators returned to neutral form overbought that had suggested some potential for consolidation of gains yesterday morning (All Exchange: +41.85 NYSE: +40.3 NASDAQ: +45.71).
• The Open Insider Buy/Sell Ratio (page 9) is neutral, dipping to 40.2 while the detrended Rydex Ratio (contrary indicator page 8) remains bearish at +0.91 as the leveraged ETF traders remain leveraged long.
• This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw another slight rise in bearish sentiment to 21.8/52.5 while the AAII Bear/Bull Ratio (contrary indicator) is a bullish 43.15/27.72.
• The counterintuitive % of SPX issues trading above their 50 DMAs is neutral at 52.9%.
• The valuation gap remains extended but less so, in our opinion, with the SPX forward multiple dropping to 21.6 with consensus forward 12-month earnings estimates from Bloomberg at $155.57 now including Q3 2021 estimates while the “rule of 20” finds fair value at 19.3.
• The SPX forward earnings yield is 4.63% with the 10-year Treasury yield at 0.7%.

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In conclusion, yesterday’s weakness was not sufficient to alter our near-term “neutral/positive” outlook for the equity markets in general.

SPX: HVS3,316/3,382

DJI: 27,132/HVR27,786

COMPQX: HVS10,986/11,315

NDX: HVS11,156/11,572 DJT: HVS11,086/11,546 MID: 1,899/HVR1,899

RTY: HVS1,550/1,590 VALUA: HVS6,199/HVR6,388

Written By: Guy S. Ortmann, CMT