How to Interpret a Stock Market Sending Mixed Signals

 | Jul 25, 2018 | 10:17 AM EDT
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What do a combination of positive and negative technical events on the charts as well as mixed trends mean for the major equity indices?

What about the data?

Is the market undervalued or overvalued?

These questions and more are answered below.

Index Charts

The indices closed mixed Tuesday with negative breadth but positive up/down volume on the NYSE while the NASDAQ saw both negative breadth and up/down volume. Both saw overall volumes rise from the prior session.

Source: Worden

The Nasdaq 100, while closing near its intraday lows, managed to register a new closing high while the Nasdaq Composite (see above) gave a warning signal as it registered a "bearish stochastic crossover." However, we would note neither the Composite's uptrend nor support were violated, dulling the crossover signal's implications unless such violations occur.

The S&P 500 (see below), Dow Jones Industrial Average and Nasdaq 100 closed higher with the rest posting losses as the Dow Transports closed back below its 50-day moving average.

Source: Worden

We also saw the cumulative advance/decline line for the NASDAQ turn negative, but it remains above its 50 DMA. The cumulative advance/decline lines for the All Exchange and NYSE remain neutral.

Data

The data remains largely neutral. All of the McClellan Overbought/Oversold Oscillators remain neutral (All Exchange:+8.76/-32.73 NYSE:+25.15/-30.1 NASDAQ:-4.86/-37.31) as are the Equity Put/Call Ratio (0.63), OpenInsider Buy/Sell Ratio (43.5) and new AAII Bear/Bull Ratio (30.67/34.67).

The Total P/C (contrary indicator) is a bullish 0.91 as is the OEX P/C that finds the pros back to being long calls at 0.62.

Valuation

The S&P 500 is trading at a forward P/E multiple of 16.8x the 12-month earnings estimate of $167.91 per share, versus the "rule of 20" implied fair value of a 17.1x multiple, with a 5.95% earnings yield.

The Bottom Line

While we continue to see some split performances on the charts and some minor deterioration in breadth, we do not believe enough evidence has been presented at this time to alter our current "neutral/positive" outlook for the major equity indices.

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