One more index broke support Tuesday, leaving the bulk of the charts in near-term negative trends while cumulative breadth has deteriorated further. The data remain mixed. Meanwhile, investment advisor sentiment and valuation continue to be concerns.
We believe an attractive buying opportunity may be forthcoming when sentiment data and valuation come more into line. However, we cannot predict when that will occur.
Here's where we stand right now.
On the Charts
The bulk of the equity indices closed lower Tuesday with negative internals except for the Nasdaq Composite and Nasdaq 100 posting gains, largely due to the action in the FAANG stocks.
While the Nasdaq 100 managed to close back above its 50-day moving average, the MidCap 400 (see above) closed below support and is now short-term negative as are all the other index charts except the Dow Jones Transports and Value Line Arithmetic Index, which are neutral.
Bottoming signals on the charts have yet to appear.
Breadth deteriorated further, which pushed the already negative cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq below their 50 DMAs.
Data Remain Mixed
The one-day McClellan Overbought/Oversold Oscillators now find the All Exchange and NYSE in oversold territory with the Nasdaq still neutral (All Exchange: -57.22 NYSE: -67.86 Nasdaq: -49.7).
Psychology continues to be of some concern, in our opinion. The Open Insider Buy/Sell Ratio remains neutral at 35.6 while the Rydex Ratio (contrarian indicator) is still bearish at 1.01. This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remains bearish at 20.4/59.2.
We continue to monitor the high levels of bullish opinions on the part of investment advisors and leveraged ETF traders as cautionary signals that, in our view, require some rather significant shifts to become more encouraging.
The valuation gap remains extended with the S&P 500 trading at a P/E multiple of 21.7x consensus forward 12-month earnings estimates from Bloomberg of $156.30 per share, while the "rule of 20" still finds fair value at 19.2x. This valuation extension has been present for the past several months.
The S&P's forward earnings yield is 4.61% with the 10-year Treasury yield at 0.7%.
Neither the charts or data are yielding signals that the recent market weakness has been fully expressed, while advisor sentiment remains overly bullish and valuation remains extended. In our view, at some point, bottoming signals will surface. Until then, however, we remain "neutral-negative" in our outlook.