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Stock Indices Are Stretched: Downside on the Way?

VIX levels imply potential for renewed volatility.
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Levels of price extension on the charts combined with stochastic readings, valuation and the VIX continue to suggest we maintain our near-term "neutral" outlook for the major equity indices.

How were the charts effected by Wednesday's action?

All of the indices closed lower yesterday with negative internals on higher trading volume. All closed near their intraday lows.

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Source: Worden

While no support levels were violated, the S&P 500 (see above) and Dow Jones Industrial Average (see below) closed below their short-term uptrend lines, turning their trends to neutral from positive. The rest remain in short-term uptrends.

Yet we continue to see all of the stochastic levels well into overbought territory while all of the charts are extended well above their 50-day moving averages and support levels. In our opinion, these extended conditions suggest there is room on the downside although no sell signals have been generated.

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Source: Worden

The VIX remains near its lows for the year at 12.94, implying the potential for some volatility re-entering the markets as well.

Valuation

The S&P 500 appears to be at fair valuation. The index sports a forward P/E multiple of 17.0x, based on consensus earnings estimates from Bloomberg of $163.30 per share, level with the "rule of 20" implied fair value of 17.0x.

Note: Certain data integral to our analysis was unavailable today so we concentrated largely on the charts.

At the time of publication, Ortmann had no positions in any securities mentioned.