After Wednesday's U-Turn, We're Getting Bullish Signals
Let's check the charts and indicators to see what happened, and where we see the recent correction.
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We're getting some bullish signals, just as leveraged exchange-traded fund traders are getting a bit cautious.
Let's run through the charts and technicals to see the shifts in the market.
The Charts
Just about every index closed near or at their session highs. The exception was the Dow Transports. We saw positive NYSE and Nasdaq internals as trading volumes expanded. These moves resulted in a number of bullish chart events.
- The S&P 500, Nasdaq and Nasdaq 100 all closed above resistance, while the Nasdaq 100 closed above its near-term downtrend line and is now neutral vs. bearish as is the S&P. But the rest remain in downtrends.
- The Dow Jones Industrial Average, the Dow Transports, and the Mid-Caps have generated “hammer” patterns, suggesting a washout of sellers.
- Cumulative market breadth is still neutral for the All Exchange, New York Stock Exchange and Nasdaq.
- Also, the Nasdaq composite generated a bullish stochastic crossover signal.
The Technicals
The data is still largely neutral, but one of the sentiment indicators is showing some improvement.
- The one-day McClellan overbought/oversold oscillators remain neutral (All Exchange: -21.27; NYSE: -24.91; Nasdaq: -19.84).
- The percentage of S&P 500 issues trading above their 50-day moving averages, which is a contrarian indicator, rose to 66% and stayed neutral.
- Of note, the detrended Rydex Ratio, another contrarian indicator, dropped further to a neutral 0.47. We see their increase in caution as a positive.
- This week’s American Association of Individual Investors Bear/Bull Ratio, again, a contrarian indicator, dropped to 0.55 and has shifted from neutral to bearish.
- The Investors Intelligence Bear/Bull Ratio remains neutral at 22.6/53.2.
- The Open Insider Buy/Sell Ratio is unchanged at 28.7% and neutral.
Finally, valuation remains a concern. The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dipped to $258.21. That leaves its forward price-to-earnings at 21.5 still well above the “rule of 20" ballpark fair value at 16.4. We believe this premium still presents some risk. Its earnings yield slipped to 4.65%.
ETF Traders
As we said, the detrended Rydex Ratio dropped further into neutral territory as the leveraged ETF traders became more cautious. We view their action as constructive as their prior excessive bullish sentiment continues to wane. Thus, we are a bit more encouraged for the near-term prospects for the indexes given the weight of the evidence, by our work, is leaning in that direction.
Treasury, Buck
The 10-year Treasury yield was unchanged at 3.65%. Support is 3.57% and resistance at 3.79%. Its near-term trend is bearish.
The U.S. Dollar, via the Dollar Index Bullish Fund UUP ETF, closed higher at $28.34. Its trend is neutral with support at $28.17 and new resistance at $28.35.
The Bottom Line
Given the positive signals coming from yesterday’s chart action combined with a further tempering of the “crowd’s” excessive bullish expectations, we believe the major equity indexes may have put in their lows of the recent market correction.