All the major equity indices closed lower Thursday. However, Nasdaq internals were only slightly negative which we find interesting given the magnitude of the afternoon selloff.
Four of the charts saw their near-term uptrend lines violated, turning said trends to neutral although no violations of price support were generated.
Meanwhile, investor sentiment continues to be overly optimistic, in our opinion, and in need of some moderation.
Where does this leave markets overall? Let's investigate.
On the Charts
All the major equity indices closed lower Thursday with negative internals on the NYSE and Nasdaq as trading volumes rose from the prior session.
All closed at or near their intraday lows.
The Nasdaq Advancers/Decliners was only slightly negative at 2,022/2,137. Given the velocity and degree of the afternoon weakness, we would have expected the Nasdaq A/D to have been more negative. We view this condition as somewhat positive.
The S&P 500 (see above), DJIA, Dow Jones Transports and MidCap 400 closed below their near-term uptrend lines and are now neutral, as is the Russell 2000.
The Nasdaq Composite, Nasdaq 100 and Value Line Arithmetic Index remain positive.
Cumulative market breadth was unchanged with the All Exchange and NYSE A/Ds neutral and above their 50 DMAs with the NASDAQ negative and below its 50 DMA.
All the stochastic levels are now neutral after flashing bearish crossovers over the past week.
On the data, the McClellan one-day Overbought/Oversold oscillators remain (All Exchange: -20.14 NYSE: -21.08 Nasdaq: -18.76).
Sentiment indicators remain cautionary. The Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, is still in very bearish territory, dipping slightly to 1.53 as they remain heavily leveraged long.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) turned more bearish as well at 16.8/63.4 with the AAII a bearish 22.73/53.17.
In general, bullish expectations have become excessive. The sentiment data continue to suggest the need of some rebuilding of the "wall of worry."
The Open Insider Buy/Sell Ratio is still bearish at 24.3.
Valuation still appears extended with the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg rising to $183.75 per share. This leaves the S&P's forward P/E multiple at 22.4x while the "rule of 20" finds fair value at 18.5x. The valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.
The S&P's forward earnings yield stands at 4.44%.
The 10-year Treasury yield closed at 1.55% and remains near what we see as support at 1.55%. We view 1.63% as resistance.
For reasons stated above, we are maintaining our near-term "neutral/positive" macro-outlook for equities.