The Technical Picture Deteriorates
The recent market rally appears to have been one within an ongoing downtrend.
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All the major equity indexes closed near their session lows Tuesday as several violated their near-term support levels. Near-term trends are bearish on all but one index. Additionally, cumulative market breadth weakened.
Meanwhile, neutral data points are being trumped by the charts, market breadth and valuation as all imply the current correction has yet to see its completion. In retrospect, the recent rally appears to have been one within an ongoing downtrend.
We believe it to be appropriate to remain cautious until enough evidence is presented to suggest otherwise.
DJIA and Russell Charts Turn Bearish
On the charts, all the major equity indexes closed lower Tuesday with negative internals on higher trading volume.
All closed near their lows of the day as the S&P 500, DJIA, Dow Jones Transports, Russell 2000 (see above) and Value Line Arithmetic Index broke below support.
Both the DJIA and Russell turned bearish from neutral as all but the Nasdaq 100, which is neutral, are in near-term bearish trends.
Also, cumulative market breadth weakened with the All Exchange, NYSE and Nasdaq advance/decline lines turning neutral from bullish.
The technical picture has deteriorated.
No stochastic signals of import were generated.
Looking at the Data
The 1-Day McClellan Overbought/Oversold Oscillators remain neutral and non-instructive as to short-term implications (All Exchange: -12.64 NYSE: -23.04 Nasdaq: -5.23).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 39% and is neutral.
The detrended Rydex Ratio (contrarian indicator) is unchanged at 0.65 remaining neutral versus its prior bearish signals.
Additionally, the new AAII Bear/Bull Ratio (contrarian indicator) rose to .81 and is now neutral as well.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is the only bearish warning at 21.5/46.2 as bulls outweigh bears by 2 to 1. As such, two of the three sentiment data points are now neutral.
The Open Insider Buy/Sell Ratio is also neutral rising to 56.5.
Leveraged ETF sentiment is 1.0, remaining neutral.
S&P Valuation Remains Extended
Regarding valuation, the 12-month consensus earnings estimate for the S&P 500 from Bloomberg rose to $244.59. However, its forward P/E multiple at 20.6x remains well above the “rule of 20” ballpark fair value of 15.3x. We reiterate that a 500-basis point premium remains a significant cause for concern.
The S&P's earnings yield is 4.77%.
The 10-Year Treasury yield rose to 4.69%. Its trend is bullish with support at 4.49% and resistance at 4.7%.
The U.S. dollar, via the UUP ETF, closed higher at $28.98 and in a bullish trend. Support is $28.49 and $29.08 resistance.
Bottom Line
While the sentiment data has become less threatening, our concerns regarding valuation should not be thrown to the wind. Also, the erosion of the market’s technical picture adds to the evidence suggesting caution remains appropriate until enough evidence is presented to suggest otherwise.
At the time of publication, Ortmann had no positions in any securities mentioned.