Despite a negative open on Wednesday due to news out of China, we are changing our near-term "neutral" outlook for the major equity indices to "positive" from "Neutral."
Everything on our screens is suggesting an imminent positive turn for the major equity indices is at hand.
Some charts have violated near-term resistance levels as well as downtrends, psychology is very bullish and there has been improvement in market breadth.
Charts See Improvement
All of the indices closed higher Monday with positive internals on the NYSE and NASDAQ. Most closed at or near their intraday highs.
Several improvements were seen on the charts as the S&P 500 (see above), and DJIA closed above near-term resistance, turning their short-term trends positive, as did the Nasdaq 100, which also closed above its short-term downtrend line. The Nasdaq Composite (see below) closed above its near-term downtrend line as well.
As a result of these improvements, we now find the S&P 500, DJIA and Nasdaq 100 in uptrends with the rest neutral while cumulative breadth has turned neutral on the All Exchange, NYSE and NASDAQ from negative.
None of the stochastic levels are overbought despite a four-day rally off of the recent lows.
Digging Into the Data
The data is generally positive with the psychology component extremely so.
The 1-day McClellan Overbought/Oversold Oscillators are neutral with the 21-day's oversold (All Exchange: +25.84/-101.77 NYSE:+27.3/-97.0 NASDAQ:+24.52/-109.08).
However, it is the psychology data that is flashing bright green. The contrarian crowd indicators are at extremely positive levels as the crowd is at some of its most pessimistic levels in years with a -3.85 detrended Rydex Ratio, 48.33/25.0 AAII Bear/Bull Ratio and Investors Intelligence Bear/Bull Ratio at 42.1/18.6.
Meanwhile, insiders have ramped up buying to a 256.3 Open Insider Buy/Sell Ratio, it's second highest in a decade.
Valuation Looks Attractive
Valuation is still quite appealing as it is well below fair value, assuming current estimates hold. The S&P 500 is a trading at a forward P/E multiple of 14.5x consensus 12-month EPS estimates via Bloomberg of $173.20 per share, versus the "rule of 20" implied fair value of 17.3x.
The "earnings yield" stands at 6.91%.