Following Wednesday's intense selling pressure, the data is strongly suggesting that the recent salvo of stocks has hit an extreme level -- one coincident with prior market bottoms that historically proved to be buying opportunities.
But what do the charts say?
Let's take a deep dive and plan our course of action.
All Indices Break More Support Levels
All of the major equity indices closed Wednesday notably below their respective short-term support levels on higher volume and terrible internal breadth. All closed near their lows of the day. So, as of the close, we have yet to see any evidence that the tide has turned to a more encouraging message.
However, one contrarian indicator suggests the selling may be reaching a climax.
The % of S&P 500 stocks trading above their 50-day moving averages has shrunk down to only 13.7%. While one may think this is a negative, it is in fact a level seen at market bottoms due to the intensity of the selling. The current level was registered at the market lows of January and February of this year.
The Crowd vs. Insiders
The data is now at levels also seen at market lows similar to the % 50.
All of the McClellan Overbought/Oversold Oscillators are deeply oversold with the 21-day readings at their deepest level since January 2016, an important market bottom.
The detrended Rydex Ratio is -1.11 (bullish)
The crowd is crushing itself at the exits as seen by the detrended Rydex Ratio (contrarian indicator, see above) that finds the leveraged ETF traders very heavily invested in leveraged short ETFs at -1.11, only surpassed at the market lows of September 2015 and March 2016. Meanwhile, insiders are buying their stock at a furious pace not seen January 2016 with a current 144.7 Open Insider Buy/Sell Ratio (see below).
The OpenInsider Buy/Sell Ratio is 144.7 (very bullish)
In our experience, when the crowd is jumping ship and insiders are on a buying spree, it's best to follow the insider's action.
Seasonality also offers a ray of hope. The November to April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative.
Valuation remains below implied fair value, with the S&P 500 trading at a forward P/E multiple of 15.4x consensus 12-month earnings of $172.35 per share versus the "rule of 20" implied fair value multiple of 16.9x.
The "earnings yield" stands at 6.49%.
While the data suggests a buying opportunity is unfolding, the charts and market breadth have yet to send confirming signals. Until that happens, we are forced to keep our near-term "neutral/negative" outlook for the major equity indices in place.