While oversold conditions may result in a short-term bounce, our discipline finds the weight of the evidence on the cautionary side of the scales.
The charts generally held support Thursday, although one closed below its intermediate-term uptrend line, while several others registered "bearish engulfing patterns," discussed below.
Let's start with charts.
On the Charts
All the major equity indices closed lower Thursday with negative internals on the NYSE and Nasdaq as volumes rose. While most support and trend lines held, the Nasdaq 100 (QQQ) closed below its intermediate term uptrend line from mid-April, weakening its technical structure.
The S&P MidCap 400 closed below its 50-day moving average while the S&P 500, DJIA, Nasdaq Composite (see above) and Nasdaq 100 saw "bearish engulfing patterns" generated.
This pattern results when a stock or index opens well above the prior day's high and then closes below the prior low, completely engulfing the prior day's range. It implies bullish actors were overwhelmed by sellers throughout the session and were unable to regain control.
Regarding trend, the Dow Jones Transports remains positive with the MidCap 400 and Russell 2000 negative as the rest remain neutral.
Cumulative breadth remains negative on the All Exchange, NYSE and Nasdaq.
Data Remain Mixed
The one-day McClellan Overbought/Oversold Oscillators are now oversold and suggesting a bounce (All Exchange: -66.04 NYSE: -76.03 Nasdaq: -58.37).
The Open Insider Buy/Sell Ratio is neutral at 52.5.
The detrended Rydex Ratio (contrary indicator) remains neutral at 0.35 with the leveraged ETF traders further reducing their leveraged long exposure.
However, this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.2/60.0 was unchanged, implying investment advisors remain excessively bullish.
The counterintuitive percentage of S&P 500 issues trading above their 50-day moving averages is neutral as well, dipping to 52.5%.
The valuation gap remains extended, despite recent declines, with the S&P 500 trading at a P/E of 22.9x consensus forward 12-month earnings estimates from Bloomberg of $146.13 per share, while the "rule of 20" finds fair value at a 19.3x multiple.
The S&P's forward earnings yield is 4.4% with the 10-year Treasury yield at 0.69%.
For the reasons stated above, we are maintaining our near-term "negative" outlook for the equity markets.