Insiders Join the Crowd at the Sell Window
All three of our market sentiment signals are now bearish.
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As markets continue their selloff Friday, are there any signs that the correction is close to running its course?
Let's examine the charts of the major equity idexes, market sentiment, data and valuation.
Correction Continues Turning S&P Bearish
On the charts, all the major equity indexes closed lower Thursaday with broadly negative internals on higher volume as all closed near their session lows, forming “bearish engulfing signals” on all.
Negative chart events occurred with the S&P 500 (see below), Nasdaq 100, Dow Jones Transports, MidCap 400 and Russell 2000 closing below support.
Regarding trends, the S&P is now bearish versus its prior neutral trend while the MidCap index turned neutral from bullish. Only the DJIA and Dow Transports are in uptrends with the Nasdaq Composite and Nasdaq 100 bearish and the Russell 2000 neutral.
Cumulative market breadth turned bearish on the Nasdaq with the All Exchange neutral and the NYSE bullish.
No stochastic signals of import were generated.
Data Suggest Further Downside Probable
The data, in our opinion, is still sending warning signals.
The 1-Day McClellan Overbought/Oversold Oscillators are still only neutral (All Exchange: -12.6 NYSE: +2.63 Nasdaq: -22.19).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 64% and is also neutral.
The detrended Rydex Ratio (contrarian indicator), however, is unchanged at 1.06 and bearish as the typically wrong leveraged ETF traders remain overexposed and leveraged long.
All three sentiment signals are now bearish. This week’s AAII Bear/Bull Ratio (contrarian indicator) stayed bearish at 0.53 as the Investors Intelligence Bear/Bull Ratio (contrary indicator) also stayed bearish at 23.2% as bulls continued to outweigh bears by a wide margin. There is no “wall of worry” to climb on their part.
Importantly, the Open Insider Buy/Sell Ratio has also turned bearish at 24.8 as insiders joined the crowd at the sell window.
Valuation Still a Concern
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dropped to $251.97 per share. That leaves its forward P/E multiple of 21.6x still well above the “rule of 20” ballpark fair value at 16.0x. We believe this premium remains significant.
Ten S&P's earnings yield rose to 4.63%.
The 10-Year Treasury yield dropped to 3.98% and below support. New support is 3.95% and resistance at 4.15%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed higher at $28.86. Its trend is neutral with support at $28.25 and resistance at $28.85.
Bottom Line
As has been the case for the past several sessions, we remain cautious for the near-term as not enough evidence has appeared to suggest the current correction is complete.