How much damage is there after Friday's big decline for stocks?
Every index chart saw some form of technical weakening while the data is sending a mix of neutral and positive readings.
Let's break it all down and see what effect it has had on our near-term outlook.
On the Charts
All of the major equity indices closed lower Friday with broadly negative internals on heavy trading volume. The result was every index chart we follow suffered some form of technical damage.
The S&P 500 (see above), DJIA, Nasdaq Composite and Nasdaq 100 all closed below their short-term uptrend lines, turning their trends to neutral, while S&P flashed a bearish crossover signal and the DJIA closed below near-term support.
The Dow Transports, S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index all closed below their 50-day moving averages with the MidCap and Russell (see below) both violating their near-term support levels.
Regarding trend, all are now neutral with the exception of the MidCap and Russell turning negative.
The cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq have shifted from positive to neutral as well.
With all of the indices closing at or near their intraday lows, the general overview suggests some overhanging technical clouds are now present that were not there the day before.
Data Is Mixed
All of the one-day McClellan Overbought/Oversold Oscillators slipped into oversold territory (All Exchange;-57.35 NYSE:-52.66 NASDAQ:-64.95). While encouraging, they are capable of become more oversold.
The Open Insider Buy/Sell Ratio (59.6), detrended Rydex Ratio (0.5) and percentage of S&P 500 stocks trading above their 50-day moving averages (60.4) are all neutral.
The S&P 500 is trading at a forward P/E multiple of 16.8x 12-month consensus earnings estimates of $166.88 per share, versus the "rule of 20" fair valuation at 17.5x.
The spread has been narrowing over the past several weeks as estimates have declined with issuers generally cutting back their projections during the recent earnings season while the S&P has risen in price.
The slow but steady pullback of forward earnings estimates over the past several weeks is a concern.
The technical damage suffered by the indices Friday on heavy volume has altered the chart trends enough to shift our outlook to "neutral" while the data is not strong enough, in our view, to compensate.