The charts of the major equity indices have suffered damage as a mix of near-term uptrend lines, 50-day moving averages and bearish stochastic crossovers were generated.
The data is now a mix of neutral and negative signals while cumulative breadth bearish divergences remain, and the S&P 500 continues to be somewhat overvalued.
The above issues continue to imply risk levels are fairly high.
On the Charts
Source: Worden
All the major equity indices closed lower Friday with negative internals on the NYSE and Nasdaq.
The bulk of the indices saw some damage appear on the charts as the S&P 500 (see above), Nasdaq Composite and S&P MidCap 400 closed below their near-term uptrend lines while the Dow Jones Transports and Value Line Arithmetic Index closed below their 50-day moving averages.
Also, the S&P, Nasdaq Composite, Nasdaq 100 and Value Line index had "bearish stochastic crossover signals" triggered.
As such, all the indices are now in near-term neutral trends with the exception of the Nasdaq 100 remaining positive.
What continues to be of concern are the cumulative advance/decline lines for the Nasdaq (see below) and All Exchange are still on bearish divergences as more stocks have been declining as the narrower indices had advanced, leaving a weak and historically risky underlying structure.
On the Data
All of the McClellan one-day McClellan Overbought/Oversold Oscillators remain neutral (All Exchange:-22.62 NYSE:-31.36 Nasdaq:-17.18) in spite of the decline on Friday.
The Open Insider Buy/Sell Ratio dropped further to 20.0 and remains bearish as insiders have ramped up their selling during recent market strength while the detrended Rydex Ratio (contrary indicator) at 1.12 is bearish as the leveraged ETF traders remain heavily leveraged long.
Last week's Investors Intelligence Bear/Bull Ratio (contrary indicator) still found advisors overly bullish at 19.3/52.9.
Valuation
The S&P 500 is trading at a P/E multiple of 19.1x consensus forward 12-month earnings estimates from Bloomberg of $174.78 per share, versus the "rule of 20" fair value multiple of 18.5x, leaving the index somewhat overvalued.
The S&P's forward earnings yield is 5.24% while the 10-year Treasury yield has declined to 1.47%.
Our Outlook
Our concerns regarding the potential for a notable correction in the markets appears to be gaining some credibility given Monday morning's weakness. The issues discussed above have yet to be relieved, thus warranting our maintaining our near-term "neutral/negative" outlook for the major equity indices at this time.
