An abrupt change in the charts and data now requires us to shift down our near-term outlook for the major equity indices. The deterioration in the charts (detailed below) and cumulative breadth are happening at same time that the data has yet to yield signals of oversold conditions.
Let me break it all down for you.
On the Charts
All of the major equity indices closed lower Thursday and at or near their intraday lows. Internals were broadly negative as well.
The net result on the charts saw the S&P 500, DJIA, Dow Jones Transports, S&P MidCap 400 and Value Line Arithmetic Index all break below their respective support levels.
The action resulted in the S&P, DJIA and Transports entering downtrends with the MidCap, Russell 2000 and Value Line turning neutral as they also closed below their short-term uptrend lines.
The S&P (see below), DJIA and Transports are now in short-term downtrends with the rest neutral. The Nasdaq Composite and Nasdaq 100 closed on support thus maintaining their neutral trend for the moment.
Source: Worden
Cumulative breadth weakened as well with the All Exchange and Nasdaq cumulative advance/decline lines turning negative and below their 50-day moving averages while the NYSE's is now neutral.
High "volume at price" (VAP) levels are seen as supportive on the S&P, DJIA and MidCap while resistant for the Value Line.
Data
The data continues its neutral message.
The one-day McClellan Overbought/Oversold Oscillators are still neutral despite the two-day selloff and not yet oversold (All Exchange:-45.62 NYSE:-46.47 Nasdaq:-45.83).
The detrended Rydex Ratio (contrary indicator) at +0.79 is neutral as is the AAII Bear/Bull Ratio (contrary indicator) at 29.0/33.0.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) remains bearish as advisors are largely bullish at 16.3/58.0.
The percentage of S&P 500 stocks above their 50-day moving averages (53.1%) is neutral as is the Open Insider Buy/Sell Ratio (35.7).
Valuation
The 12-month forward consensus earnings estimate from Bloomberg for the S&P 500 is $173.02 per share, leaving the forward P/E multiple at 17.1x, while the "rule of twenty" finds fair value at 18.1x, suggesting the markets are somewhat undervalued.
The 10-year Treasury yield is 1.89%.
The earnings yield stands at 5.88%.
Bottom Line
The deterioration on the charts as well as market breadth combined with the fact that the data has yet to suggest oversold conditions exist that would imply a bounce require us to alter our near-term "neutral/positive" outlook to "neutral/negative."
