Index Charts Turn Neutral

The major equity indexes closed lower Monday on heavy trading volume with the one exception of the posting a gain. Internals were negative on the while the saw negative breadth but positive up/down volumes. The charts saw several of the indexes close below their near-term uptrend lines shifting said trends from positive to neutral. As well, some bearish stochastic crossover signals were generated. Meanwhile, the 1-day McClellan OB/OS oscillators have moderated back to neutral that may offer some short-term relief. However, valuation and investor sentiment data remain cautionary. As such, despite strong futures this morning, we are maintaining our near-term “neutral” outlook for the equity markets as trends should be respected while the data scale, in our opinion, counterbalances.

On the charts, the major equity indexes closed lower yesterday except for the NDX posting a gain.

  • NYSE internals were negative on heavy volume while the NASDAQ’s were mixed.
  • Of note, the DJI (page 2), DJT (page 4), MID (page 4), RTY (page 5) and VALUA (page 5) closed below their near-term uptrend lines and are now neutral while the DJI and DJT generated bearish stochastic crossover signals.
  • As such, the only indexes still in near-term uptrends are the SPX (page 2), CPOMPQX (page 3) and NDX (page 3).
  • Cumulative breadth remains positive and above the 50 DMA on the All Exchange and NASDAQ while the NYSE’s has turned neutral from positive.
  • As such, the charts have seen some slight weakening.

On the data, the 1-day McClellan OB/OS Oscillators that were overbought yesterday morning have shifted back to neutral, possibly offering some short term relief (All Exchange: +28.23 NYSE: +16.58 NASDAQ: +36.22).

  • The Open Insider Buy/Sell Ratio (page 9) remains in neutral territory at 28.8 but near bearish levels as it continues its downtrend as the number of insider selling transactions has been outweighing purchases consistently over the past several sessions.
  • The detrended Rydex Ratio (contrarian indicator) spiked to a very bearish 1.65 as the leveraged ETF traders are now leveraged long up to their eyeballs. Such excessive bullishness on the part of the leveraged ETF traders is worthy of some real concern, in our opinion.
  • This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw another decline in bearish advisors as bullish sentiment increased and remains in bearish territory at 17.2/64.6.
  • Generally speaking, everyone is on the bullish side of the boat.
  • The valuation gap remains extended with the SPX forward multiple of 22.7 with consensus forward 12-month earnings estimates from Bloomberg of $159.32 while the “rule of 20” finds fair value at 19.2.
  • The SPX forward earnings yield is 4.4% with the at 0.84%.

In conclusion, we believe there is enough evidence to suggest proceeding with some degree of caution, causing us to maintain our near-term “neutral” outlook for the equity markets.

: 3,547/NA

: HVS29,215/NA

COMPQX: HVS11,905/NA

NDX: HVS11,990/12,400

DJT: 12,308/NA

MID: 2,118/NA

RTY: 1,700/NA

VALUA: 7,298/NA

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