The major equity indices closed lower Thursday with negative internals on the NYSE. The Nasdaq had negative breadth but positive up/down volume. The indices closed at the midpoints of their intraday ranges after a weak open.
However, the Nasdaq Composite (see below) and Nasdaq 100 closed below their 50-day moving averages with the Composite also violating its near-term uptrend line and is now neutral.
Meanwhile, the MidCap 400 closed below support and its uptrend line, also turning neutral. The Dow Jones Transports broke support.
So, regarding near-term trends, all the indices are neutral except the Value Line Arithmetic Index and Russell 2000, which stayed positive.
The positive action of the unweighted Value Line index offers some encouragement, in our view.
The cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain positive while stochastic levels remain overbought but lacking bearish crossover signals.
A Look at the Market Data
The McClellan 1-Day Overbought/Oversold Oscillators have shifted back to neutral from overbought, which may relieve some pressure (All Exchange: +37.26 NYSE: +30.97 Nasdaq: +41.49).
The Rydex Ratio (contrarian indicator), however, measuring the action of the leveraged ETF traders, rose to 1.37 and remains in bearish territory.
This week's AAII bear/bull ratio stayed neutral at 26.58/36.64. The Investors Intelligence Bear/Bull Ratio (contrary indicator) saw another drop in bullish sentiment to 16.8/51.5, but remains bearish. We reiterate, the drop in AAII and II % of bulls is an improvement from what we had previously viewed as an excess of bullish expectations.
The Open Insider Buy/Sell Ratio dipped to 29.1 and remains neutral. It continues to show a notable lack of buying interest on their part.
Extended Valuation Continues
Valuation continues to appear extended with the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg rising to $191.13 per share. However, the S&P's forward P/E multiple dropped below 22.0x for the first time in quite a while at 21.9x, while the "rule of 20" finds fair value at 18.4x. The valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.
The S&P's forward earnings yield is 4.56%.
The 10-year Treasury yield closed at 1.63% and at resistance. A move above that level could prove problematic for the equity markets. We view support at 1.55%. We continue to believe the moves in the 10-year yield may well have the greatest influence over the near-term action on the equity indices.
The net result of Thursday's action suggests we maintain our current "neutral/positive" near-term macro-outlook for equities.