All of the major equity indices closed deeply lower Monday with broadly negative internals.
Chart damage was seen on the S&P 500, DJIA, Nasdaq Composite, Nasdaq 100 and Dow Jones Transports as all closed below their respective support levels and 50-day moving averages.
The S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index also broke support.
All of the indices are in short-term downtrends and below their 50-day moving averages.
So why are we becoming less negative in our outlook?
The NYSE saw close to 10:1 negative breadth and up/down volume Monday. Such an extreme is usually seen near market lows.
Also, bear in mind that since turning cautious Friday morning, the DJIA (see below) has dropped approximately 1,700 from peak to trough.
All of the stochastic levels are deeply oversold. They can stay that way for extended periods, but we view it as a potential positive.
The high "volume at price" (VAP) levels are now seen as supportive on the S&P, DJIA, Nasdaq Composite and Nasdaq 100, suggesting some possible stabilization.
Unfortunately, this cannot be said for the MidCap, Transports and Value Line where they are seen as resistant.
The data has turned a bit more encouraging.
All of the one-day McClellan Overbought/Oversold Oscillators are now deeply oversold suggesting a bounce or pause (All Exchange:-113.52 NYSE:-118.39 NASDAQ:-113.22).
The Open Insider Buy/Sell Ratio (37.3) remains neutral.
Investor sentiment data (contrary indicator) is not available this morning but we would be quite surprised if we did not see a notable increase in bearish sentiment, creating the proverbial "wall of worry."
Valuation has now become quite compelling based on current forward earnings estimates for the S&P 500. The 12-month forward consensus earnings estimate from Bloomberg for the S&P is now $172.55 per share, leaving the forward P/E multiple at 16.5x while the "rule of twenty" finds fair value at 18.3x. This now suggests valuation is considerably more appealing now than just a few weeks ago.
The 10-year Treasury yield is 1.74%.
The earnings yield stands at 6.06%.
While lacking some of the important sentiment data and the charts remaining in near-term downtrends, there has been enough evidence presented in the form of extremely negative market breadth, high VAP support levels and deeply oversold OB/OS Oscillators to shift up to a "neutral" near-term outlook from our prior "neutral/negative" view.