As two of the stock indices advanced Thursday, the S&P 500 closed below the short-term uptrend line, shifting the trend to neutral from positive. Also alarmingly, market breadth deteriorated further, leaving all indices in short-term downtrend.
And while oversold conditions may offer a break from recent weakness, psychology remains cautious of an overabundance of bullish sentiment as insiders show lukewarm interest in buying their stocks at these levels.
On the charts
Of the major stock indices, only the DJIA and Dow Jones Transports saw gains on Thursday, while market width remained negative.
Meanwhile, the S&P 500 closed in the charts below its short-term uptrend line and is now neutral, as are the MidCap 400 and Value Line Arithmetic Index.
The Dow Transports and Russell 2000 remain in a downtrend in the near term.
In latitude, the cumulative up/down line for the NYSE turned negative, joining the All Exchange and Nasdaq in that regard.
What is perhaps most disturbing is the negative divergence between the uptrend of the Nasdaq Composite, while the Nasdaq A/D remains in a downtrend as it continues to make lower lows. Such divergences typically result in some form of market correction.
NASDAQ’s cumulative rise/fall line is negative and is below 50 DMA.
Also, the S&P and Nasdaq provided 100 bearish stochastic crossover signals.
All McClellan 1-Day Overbought/Oversold are in oversold territory (All Exchange: -78.34 NYSE: -70.33 Nasdaq: -83.53). They can provide a break from recent weakness at these levels.
However, the Rydex ratio (opposite indicator), which measures the action of the leveraged ETF traders, remains bearish at 1.3 as they remain leveraged for a long time.
This week’s contrarian AAII bear/bull ratio (23.33/43.07) also moved back into slightly bearish territory, while the Investors Intelligence Bear/Bull ratio (opposite indicator) showed a decline in bears and a rise in bulls, and remained bearish at 15.5/60.8. It continues to suggest an excess of bullish expectations in our view.
The Open Insider Buy/Sell ratio has returned to a neutral 26.1 but still shows a lack of appetite among insiders to buy their own shares at these levels.
Valuation and Treasury returns
Bloomberg’s 12-month earnings forecast for the S&P 500 has risen to $199.28 per share. As a result, the S&P’s forward P/E multiple is 21.9x, with the “rule of 20” finding the fair value at about 18.7x. t
The return on future earnings of the S&P is 4.57%.
The 10-year yield closed lower at 1.3% and remains an important factor. We see support at 1.2% and resistance at 1.44%. We suspect that the recent drop in yields may be the result of a “flight to safety”.
The combination of poor underlying width, chart divergences and psychological data suggests greater caution is now in order as the potential for a correction increases. Selectivity is becoming more and more intensive.
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