The Correction Is Not Over
Trends of three major indexes shifted Thursday — and here's why the damage might not be done.
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Thursday's market selloff saw all the major equity indexes close near their session lows and their charts suffer damage. Three broke support while another three violated their uptrend lines and are now neutral versus bullish. Cumulative market breadth also slipped to neutral from bullish on these three exchanges.
Meanwhile, the data are not showing any strong suggestion that the recent market correction has been completed.
Let's dig deeper now into the charts and data to see what could be next.
Weak Session Sees Three Indexes Turn Neutral
On the charts, all the major equity indexes closed lower Thursday with broadly negative internals that produced several cracks in the chart structures.
The S&P 500 (see below), Nasdaq 100 and Dow Jones Transports broke below support, while the S&P, Nasdaq Composite and Russell 2000 closed below their accelerated uptrend lines and are now neutral versus their prior bullish trends.
The rest of the index trends, however, are still bullish.
Cumulative market breadth also took a hit with the advance/decline lines for the All Exchange, NYSE and Nasdaq turning neutral from bullish.
Additionally, the S&P registered a bearish stochastic crossover signal.
Sentiment Is Cautionary
The data, in our opinion, has yet to send signals that the correction is done.
The 1-Day McClellan Overbought/Oversold Oscillators are only neutral and not at oversold levels that would suggest some bottoming (All Exchange: +35.2 NYSE: +35.12 Nasdaq: +36.63).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) did dip to 70% from its prior cautionary levels.
Of import, the detrended Rydex Ratio (contrarian indicator) remains bearish as it rose to a bearish 1.23 as the leveraged ETF traders increased their already overexposed leveraged long exposure. We need to see some fear on their part.
Thus, two of the three sentiment indicators are bearish with this week’s AAII Bear/Bull Ratio (contrarian indicator) unchanged at 0.59 and neutral as the Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 16.9/63.1 as bulls continue to outweigh bears by a wide margin.
The Open Insider Buy/Sell Ratio remains neutral slipping to 29.3.
Leveraged ETF sentiment is 20.2 and also neutral.
Valuation Concerns
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dropped to $252.44 per share, leaving its forward P/E multiple of 22.0x well above the “rule of 20” ballpark fair value at 15.8x. This over 600-basis point premium is significant.
The S&P's earnings yield is 4.55%.
The 10-Year Treasury yield rose to 4.19%. Support is 4.1% and resistance is at 4.2%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed higher at $28.74. Its trend is bearish with support at $28.58 and $28.75 as resistance.
Bottom Line
We need to see more evidence to have confidence that the market correction has run its course.
The weight of the evidence implies caution remains appropriate with sell signals being honored on individual names.