3 More Indices Have Flashed This Bearish Signal

 | May 25, 2018 | 11:18 AM EDT
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The number of bearish stochastic crossover signals continues to increase. Three more indices have now flashed that warning sign, leaving just one hold out. Meanwhile, the 21-day OB/OS Oscillator is now overbought.

How concerning is all of this and does it affect our outlook for the major equity indices?

Let's break it all down for you.

Index Charts

The indices closed mixed Thursday with negative NYSE internals. The Nasdaq saw negative breadth but positive up/down volume. The Dow Transports, S&P MidCap 400 Index and Russell 2000 closed higher on the day as the rest declined and the Nasdaq Composite closed on resistance.

While no support or resistance levels were violated, the Dow Jones Industrial Average (see above), S&P MidCap 400 and Value Line Arithmetic Index flashed "bearish stochastic crossover signals," leaving only the S&P 500 (see below) not in that condition.

This does cast a bit of a cloud, considering that over the past several months said signals have been followed by varying degrees of market weakness, but they should be used for confirmation purposes. We would need to see further price action weakness for the signals to become more pertinent.

The Value Line, Russell and Nasdaq 100 indices are still in near-term uptrends with the rest neutral. All of the cumulative advance/decline lines are positive and above their 50-day moving averages.

Data

While the 1-day McClellan Overbought/Oversold Oscillators are neutral, all of the 21-day levels have slipped into overbought conditions (All Exchange:+16.43/+54.36 NYSE:+13.67/+59.87 NASDA:+19.86/+51.75).

The Equity Put/Call Ratio (0.64) and OpenInsider Buy/Sell Ratio (40.6) are neutral with the Total P/C (0.87) and OEX P/C (0.85) bullish.

Valuation

The forward P/E multiple for the S&P 500 based on 12-month consensus earnings estimates from Bloomberg of $163.24 per share is 16.7x versus the "rule of 20" implied fair value of 17.0x.

Our Outlook

While we see some caution signaled by the stochastic levels and 21-day OB/OS, with valuation close to fair value, not enough of a shift has occurred on the charts and data to warrant a change in our current "neutral/positive" outlook for the major equity indices.

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