Time for a downgrade in our market outlook.
Why now, since the index charts generally look OK?
We have become more concerned in our outlook as insiders remain active sellers while investment advisors remain bullish as market breadth continues to deteriorate. Meanwhile, valuation continues to appear extended in the face of the recent rise in interest rates.
As such, as the markets are becoming more selective in terms of bullish participants.
On the Charts
All the major equity indexes closed lower Tuesday with negative internals on the NYSE and Nasdaq as all closed at or near their intraday lows.
While no violations of support were generated, the Nasdaq Composite (see above) closed below its uptrend line once again, turning its trend to neutral, while the Nasdaq 100 closed back below its 50-day moving average.
The Nasdaq Composite, Nasdaq 100 and Russell 2000 are in neutral trends with the rest positive.
However, market breadth continues to weaken with the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq staying negative as fewer stocks are participating in bounces from the recent increases in volatility.
As such, while the index charts generally look OK, their underlying support has been deteriorating.
Regarding the Data...
The McClellan one-day Overbought/Oversold Oscillators are back to oversold on the All Exchange and Nasdaq with the NYSE's neutral, suggesting another bounce (All Exchange: -64.21 NYSE: -43.35 Nasdaq: -81.18).
However, the Open Insider Buy/Sell remains a real concern as its bearish 18.1 reading suggests insiders remain active sellers with little interest in buying their shares at current levels. Historically, they have been on the right side of the action.
The leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator) remains neutral at 0.92 as they have yet to return to their prior heavily leveraged long exposure.
But this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) was little changed at a bearish 18.5/56.3, suggesting too much optimism exists on the part of investment advisors.
Valuation Still Appears Extended
The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg of $173.58 per share leaves the S&P's forward P/E multiple at 22.3x, while the "rule of 20" finds fair value at 18.6x. The valuation spread has been consistently wide over the past several months while the forward estimates have continued to rise consistently.
The S&P's forward earnings yield is 4.49%.
The 10-year Treasury yield slipped to 1.42% after fulfilling our expectation of a move to 1.5% level last week.
While we would prefer to be more bullish, insiders, poor breadth and overly optimistic advisors require us to shift to a "neutral/negative" near-term outlook at this time.