Get Ready for Sideways Chop
Several technical cracks have appeared on the index charts and on cumulative market breadth.
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Where is the market headed now? Our map shows further sideways chop down the road, so buckle in.
The index charts and breadth, meanwhile, have weakened, and the percentage of S&P 500 issues above their 50-day moving average is returning to neutral.
This comes after the major equity indexes posted losses Tuesday with negative New York Stock Exchange and Nasdaq internals, as trading volumes dipped from the prior session. All closed near their intraday lows that saw several technical cracks appear on the charts as well as cumulative market breadth.
The data dashboard remains generally neural but the percentage of S&P stocks trading above their 50-day moving average that had been warning about a correction returned to neutral, while insiders did some buying. Meanwhile, the forward 12-month earnings estimates from Bloomberg took a hit that leaves the forward 12-month price-to-earnings for the S&P extended well above ballpark fair value.
The Charts and Technicals
On the charts, all the major equity indexes closed lower yesterday with negative New York Stock Exchange and Nasdaq internals and near their session lows.
Charts saw some deterioration, as the Nasdaq 100 closed below support while the S&P 500 and the Nasdaq Composite Index closed below their near-term uptrend lines and are now neutral vs. their prior bullish trajectories. The same goes for the mid-cap stocks and the Russell 2000 small caps.
Cumulative market breadth also slipped with the advance/decline lines for the All Exchange and NYSE dropping to neutral from bullish while the Nasdaq’s turned bearish.
Additionally, the stochastic levels finally generated bearish crossover signals on the Dow Jones industrial average, Nasdaq Composite and mid-caps.
The data is largely neutral, but two data points have improved.
The one-day McClellan overbought/oversold oscillators are still neutral (All Exchange: -13.68; NYSE: -10.44; Nasdaq: -16.29). But the percentage of S&P issues trading above their 50-day moving averages, which is a contrarian indicator, dropped back to neutral at 77% from its previous warning signal of 83%.
Another contrarian indicator, the detrended Rydex Ratio is unchanged at 0.92 and still neutral.
Of note, the Open Insider Buy/Sell Ratio rose to 47.5 from 36.9 as insiders did some buying that was more notable than recently. It remains neutral.
Two contrarian sentiment indicators also made moves: This week’s American Association of Individual Investors Bear/Bull Ratio dipped to a neutral 0.58, but the number of bears declined. The Investors Intelligence Bear/Bull Ratio, meanwhile, remains neutral at 22.6/52.5, but the number of bulls rose.
Finally, valuation does remain a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg dropped to $255.97 from $256.80, leaving its forward price-to-earnings at 22.3. That's still well above the “rule of 20” ballpark fair value at 16.3. We believe this premium still presents some risk.
Its earnings yield is 4.46%.
Treasury and the Buck
The 10-year Treasury yield slipped to 3.74%. Support is 3.74% and resistance at 3.82%. Its near-term trend is now neutral vs. its previously bearish trend.
The U.S. Dollar, via the U.S. Dollar Index Bullish fund UUP, closed higher at $28.30 and above resistance. Its trend is neutral with support at $28.16 and new resistance at $28.34.
The Bottom Line
In conclusion, we still have a few clouds overhead suggesting some further sideways chop appears likely.