The magnitude of Monday's intraday reversals was significant, flashing possible topping signals. What's more, the data is mixed with the psychology numbers turning cautionary.
As such, with the bifurcated market we discussed seeing the select group of leaders showing potentially important cautionary signals, as well as other factors, we now believe the weight of the evidence has shifted sufficiently to change our near-term outlook.
On the Charts
The only equity index to post a gain Monday was the DJIA as the rest declined.
While no violations of support or trend were registered, the significant intraday reversals flashed some serious warning signs as the Nasdaq Composite (see above) and Nasdaq 100 formed "bearish engulfing patterns" by closing near their intraday lows within a broad range that completely engulfed the prior day's range.
Such technical action after a significant run implies supply may now be overtaking demand.
We would also note the Nasdaq cumulative advance/decline line has turned negative. As the Nasdaq indices have far outperformed the other indices, we view this shift as potentially significant.
Data Become More Mixed
The one-day McClellan Overbought/Oversold Oscillators are mostly neutral except for the Nasdaq's, which is mildly oversold (All Exchange: -47.49 NYSE: -38.48 Nasdaq: -55.67).
The Open Insider Buy/Sell Ratio is neutral at 34.8 while the detrended Rydex Ratio (contrary indicator) lifting to 0.78 has moved into mildly bearish territory as the leveraged ETF traders have become somewhat over weighted long.
This week's AAII Bear/Bull Ratio (contrary indicator) remains bullish at 45.82/24.8.
However, The Investors Intelligence Bear/Bull Ratio (contrary indicator) finds advisors overly bullish at 20.2/50.7.
The counterintuitive percentage of S&P 500 issues trading above their 50-dy moving averages returned to neutral at 60.8.
Valuation continues to appear extended with the S&P 500 trading at a P/E of 22.1x consensus forward 12-month earnings estimates from Bloomberg of $142.75 per share, while the "rule of 20" finds fair value at a 19.4x multiple.
The S&P's forward earnings yield is 4.52% and the 10-year Treasury yield is at 0.6%.
The reversals of the Nasdaq Composite and Nasdaq 100, which have well outperformed the others, flashed possible topping signals Monday. That, when combined with declining Nasdaq breadth, some cautionary psychology data and valuation now suggest we shift our near-term outlook to "neutral/negative."