The Technicals Are Saying: Look to Buy on Weakness
All major equity indexes stay near-term bullish as the McClellan one-day overbought/oversold oscillators revert to neutral.
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After our few days of "patience," look now to buy on weakness.
That was the technical read as the major equity indexes closed mostly lower Friday with negative New York Stock Exchange and Nasdaq internals, and as trading volumes swelled from the prior session.
Digging deeper, last week's end of trading saw most indexes close near the midpoint of their intraday ranges. It also saw a few key technical events that left all the index charts still in near-term bullish trends while cumulative market breadth remains bullish as well. On the data side, it is largely neutral, including the McClellan one-day oversold/overbought oscillators that downshifted from overbought.
But the forward valuation of the S&P via Bloomberg’s forward 12-month earnings estimates remains well extended above ballpark fair value. Thus, we see the weight of the evidence continuing to suggest buying weakness in names that meet our fundamental and technical criteria.
Charts and Technicals
On the charts, the major equity indexes closed lower Friday with the one exception of the Dow Jones posting a gain and a new closing high.
On the other hand, the Dow Jones transports closed below support and near its lows of the day.
Yet all the index charts remain in near-term bullish trends as do the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq.
The Dow Transports also registered a bearish stochastic crossover as the rest remain overbought. We reiterate they can stay overbought for extended periods.
The data is largely neutral, meanwhile, including the one-day McClellan over-bought/oversold oscillators that were overbought Friday morning (All Exchange: 31.68; NYSE: 38.41; Nasdaq: 27.77).
Additionally, the percentage of S&P issues trading above their day moving averages, a contrarian indicator, dipped to 78% from 81% turning neutral from bearish as well.
Another contrarian indicator, the detrended Rydex Ratio dropped to 0.58 from 0.94 and is neutral as the leveraged exchange-traded fund traders became more fearful. We view that as a positive.
The Open Insider Buy/Sell Ratio dropped to 27.2% but remains neutral.
Also, other contrarian indicators such as last week’s American Association of Individual Investors' Bear/Bull Ratio, a contrarian indicator, rose to 0.61 as the number of bears rose, staying neutral.
The Investors Intelligence Bear/Bull Ratio remains neutral at 22.6/43.5 as the number of bulls declined by almost 10 points and also encouraging.
Finally, valuation does remain a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg dipped to $257.24. That leaves its forward price-to-earnings at 22.2, 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 4.51%.
The Treasury and the Buck
The 10-year Treasury yield slipped to 3.73%. Support is 3.57% and resistance at 3.79%. Its near-term trend is bearish.
The U.S. Dollar, via the Dollar Index Bullish Fund UUP closed higher at $28.18. Its trend is bearish with support at $28.06 and resistance at $28.22.
The Bottom Line
In conclusion we believe in now buying weakness in names that fit our fundamental/technical criteria.