We have been under the assumption that the worst of the market's declines had been established due to chart and breadth improvements combined with high investor fear and lower valuation levels. That assumption is now nullified.
We will respect the trend until proven otherwise.
There are several economic reports due this week as well as the Fed's rate decision on Wednesday. We will watch to see what impact they may have on the market's price action.
On the Charts
All the major equity indexes closed notably lower Friday with negative internals as the hot CPI data put upside pressure on the 10-Year Treasury yield, thus compressing the S&P 500's forward 12- month multiple to expected earnings.
All closed at the lows of the session and below support, turning their near-term trends to neutral from bullish.
So far Monday, the losses have continued with all indexes currently below our suspected new support levels (see below) with very negative market internals.
The action over the past two sessions has done enough damage that our assumption of the current market correction being completed has now been nullified.
As this is being written, the charts are negative with no signs of reversing. Whether there will be enough buyers to lift prices above the new supports we have noted has yet to be determined. The trends that were encouraging up until Friday have all been broken and should be respected until there is enough evidence regarding improving breadth and trend are presented.
The stochastic levels that gave bearish crossover signals Friday morning are now oversold but that is not enough to warrant short term optimism.
Index Support Levels
S&P 500: 3,811
Nasdaq Composite: 11,095
Nasdaq 100: 11,472
Dow Jones Transports: 13,098
MidCap 400: 2,333
Russell 2000: 1,760
Value Line Arithmetic Index: 8,295
S&P 500 Valuation and Treasury Yields
Another important other top to discus is the impact of the 10-Year Treasury yield on the forward 12-month multiple of expected S&P 500 EPS over the same time frame.
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 has slipped slightly to $236.60 per share. With the S&P currently trading around 3790, its forward P/E multiple is 16.0x, a discount to the current ballpark "rule of 20"fair value at 16.7x.
However, the higher the 10-Year Treasury yield goes, the more the fair value multiple contracts. It's all about watching the 10-Year for now.
The S&P's forward earnings yield is 6.24% as this is being written.
The 10-Year Treasury yield closed higher at 3.04%. We view support as 2.89%. Having violated prior resistance, new resistance is 3.51%.