Most of the indices closed lower Thursday with negative internals on the NYSE, while the NASDAQ's were mixed. Both occurred on higher volume than the previous trading session. Two of the index charts did see breaks below support. However, the DJIA rallying 600 points above its intraday low, as did the rest of the indices, offers some encouragement as it implies a possible washout of near-term selling pressure.
The majority of the data is neutral. Yet we would also note the markets appear to be well undervalued via the "rule of 20" theory. Nonetheless, we are maintaining our near-term "neutral" outlook awaiting violations of resistance required to turn more positive.
On the charts, the Nasdaq Composite (below) and Nasdaq 100 managed to close higher Thursday as the rest posted losses. We would note, however, that all closed significantly above their intraday lows due to a surge of buying in the last hour of trade.
We view this action as encouraging for two reasons. In our opinion, the first hour of trade is largely based on emotional reactions to the pertinent news of the morning while the last hour of trade is more disciplined in its activity. Thus a notable lower open and intraday weakness followed by a late-day surge in buying is viewed as a positive.
As well, given that the DJIA had dropped over 1,400 points from the prior session high, it implies there may have been a washout of near-term selling pressure. Yet negative chart action was seen on the S&P MidCap 400 Index (below) and the Value Line Arithmetic Index as both closed below support, turning their near-term trends to negative. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain neutral.
The majority of the data remains neutral including all of the McClellan Overbought/Oversold Oscillators (All Exchange:-1.87/-28.42 NYSE:-1.39/-21.06 NASDAQ:-3.1/-34.06). Valuation, however, seems to be quite appealing as it is well below fair value. Assuming current estimates hold, with the forward 12-month earnings estimates for the S&P 500 via Bloomberg of $170.94, the forward 12-month P/E for the S&P 500 is 15.8 versus the "rule of 20" implied fair value of a 17.1 multiple. The "earnings yield" stands at 6.3%.
Seasonality remains encouraging as the November-to-April period coming out of a mid-term election year has seen positive returns since 1946 with a median return of 15% since 1930. Only two out of 21 periods were negative.
So, Thursday's late action combined with the charts and data keep us of the opinion that we should maintain our near-term outlook at "neutral". However, we are inclined to suspect the eventual resolution will be to the upside.