Stay Cautious Amid Mixed Technical Signals
Breadth is bearish but overbought/oversold oscillators suggest a bounce.
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We're getting mixed technical signals after Friday's close: Cumulative breadth looks bearish but the McClellan overbought/oversold oscillators suggest we should see a bounce.
My takeaway? I'm still a bit cautious here. Let me explain.
The major equity indexes closed mixed Friday with negative New York Stock Exchange internals as the Nasdaq saw negative breadth, but positive up/down volume. All closed near their session lows, giving up the early session gains. While a few technical events were registered on the charts, the near-term trends remain a mix of bullish, neutral and bearish projections. But cumulative breadth remains negative and still a concern. The data finds two of the McClellan overbought/oversold Oscillators oversold, suggesting a bounce, while the rest are mostly neutral. But the forward price-to-earnings for the S&P 500, based on Bloomberg’s forward 12-month earnings estimates continues to trade significantly above ballpark fair value.
Charts and Technicals
We saw gains on the Nasdaq composite index, Nasdaq 100 and the Dow Jones Transports but the rest posted losses. The Dow Jones industrial average closed below support as the Nasdaq and Nasdaq 100 closed above resistance. But there were no changes in trend. The Russell 2000 is still bearish with the Dow Jones Transports bullish and the rest neutral. Unfortunately, cumulative breadth is still bearish on the All Exchange, NYSE and Nasdaq suggesting some further deterioration of the market’s foundation. No stochastic signals of import were registered.
The data remains largely neutral. Two of the one-day McClellan OB/OS oscillators are oversold and suggesting a bounce with the Nasdaq’s neutral (All Exchange: -54.35; NYSE: -89.08; Nasdaq: -32.71).
Meanwhile, the percentage of S&P issues trading above their 50-day moving averages, a contrarian indicator, dipped to 56% staying neutral. The Open Insider Buy/Sell Ratio rose to 41.4, but stayed neutral, as well. Also, the detrended Rydex Ratio, a contrarian indicator, fell to 0.87 and is now neutral vs. its prior bearish warning. That's easing some sentiment concerns.
But look at these other contrarian indicators. Last week’s American Association of Individual Investor Bear/Bull Ratio remained bearish at 0.53 as the crowd was overly bullish. The Investors Intelligence Bear/Bull Ratio also remained bearish with bulls overwhelming bears at 21.3/55.7. They still suggest there is an excess of bullish expectations now.
Finally, valuation remains a concern. The 12-month consensus earnings estimate for the S&P 500 from Bloomberg slipped to $255.16, leaving its forward price-to-earnings of 22.8 well above the “rule of 20” ballpark fair value at 15.8, as has been the case for the past several months. We believe this premium still presents some risk. Its earnings yield is 4.39%.
Treasury and the Buck
The 10-year Treasury yield rose to 4.23. Support is 4.10% with resistance at 4.25%. Its near-term trend is bullish. The U.S. Dollar, via the Dollar Index Bullish Fund UUP, closed higher at $29.28. Its trend is bullish with support at $29.02 and resistance at $29.32.
Bottom Line
The weight of the evidence still suggests it’s time to be more cautious regarding the market’s near-term prospects given the deterioration of market breadth and valuation.