What will be the igniter?
Was Friday's jobs report the positive news trigger this stock market needed? Maybe it will be substantive progress on a U.S.-China trade deal?
Regardless, we believe that the equity markets are making a bottom that could see a rapid reversal, given the sentiment extremes, should some positive news hit the tape. Valuation looks compelling as well.
All of the major equity indices closed lower Thursday with negative internals on the NYSE and NASDAQ as volumes rose from the prior session. The S&P 500 (see below) and DJIA closed below support and their near-term uptrend lines, turning their trends to neutral as are the rest of the index charts.
We find it interesting that one of the FAANG stocks that was a "darling" over the past several months made a new 18-month low. Yet, in spite of that downdraft, as well as the relatively recent weakness in the rest of the FAANGs, the indices made higher lows than those seen near the end of December.
The saying "The generals are the last to leave the field" suggests to us that a bottoming process is taking place.
Data Is Generally Positive
The 1-day McClellan Overbought/Oversold Oscillators are back to neutral with the 21-day levels still oversold (All Exchange:+41.67/-97.6 NYSE:+47.4/-90.76 NASDAQ:+32.36/-108.32).
But the psychology levels are really getting our attention as they remain extremely positive. When the crowd becomes excessively bearish as insiders gobble up stock, it is usually coincident with a market bottom. That is exactly what we currently have.
The contrarian indicator of the detrended Rydex Ratio has the leveraged ETF traders at their most extreme level of leveraged short in a decade. Also, The AAII Bear/Bull Ratio and Investors Intelligence Bear/Bull Ratio find bears outnumber bulls by 2:1.
Meanwhile, insiders are sucking up stock with a very bullish 223.8 Insider Buy/Sell Ratio. In our opinion, this is akin to very dry wood just waiting for a spark.
The OpenInsider Buy/Sell Ratio is 223.8 (very bullish)
Valuation still seems to be quite appealing as it is well below fair value, assuming current estimates hold. The S&P 500 is trading at a forward P/E multiple of 14.2x consensus 12-month earnings estimates via Bloomberg of $172.50 per share, versus the "rule of 20" implied fair value multiple of 17.5x.
The "earnings yield" stands at 7.05%.
We remain "positive" in our near-term outlook due to psychology, valuation and the fact that the indices made a higher low in spite of one of the FAANG components issuing notably negative news Thursday. We believe this also suggests a bottoming process is taking place.