The primary focus of our attention right is the continuing deterioration of market breadth. Our daily review of approximately 1,600 stock charts is in concert with the Nasdaq cumulative A/D line making a lower low as is the All Exchange with both below their 50-day moving averages.
Our recent comments about market selectivity have reached a tipping point, in our opinion, suggesting the market's internal structure has weakened to an unhealthy state. When combined with the psychology data, we now believe it appropriate to shift our near-term macro-outlook for equities to "neutral/negative" from "neutral/positive.
On the Charts
The major equity indices closed mixed Wednesday with negative internals on the NYSE and Nasdaq.
While the S&P 500, DJIA, Nasdaq 100 and Dow Jones Transports advanced with the Nasdaq 100 posting a new closing high, the rest declined with the Russell 2000 turning negative as it closed below its support as the Nasdaq Composite gives a bearish stochastic crossover signal.
The trends now find the S&P, DJIA, Nasdaq Composite and Nasdaq 100 in uptrends with the MidCap 400 and Value Line Arithmetic Index neutral. The Dow Transports and Russell 2000 are now in near-term bearish trends.
We draw attention to the deterioration of market breadth that is now, in our view, in an unhealthy state to the degree that we believe market advances may become increasingly more difficult. Of note is the Nasdaq A/D (see below) making a lower low.
The Nasdaq cumulative advance/decline line is negative and below its 50 DMA.
While some individual names may continue to advance, an increasing majority are going in the opposite direction.
All the McClellan 1-Day Overbought/Oversold in oversold territory and may offer a cushioning effect near term (All Exchange: -69.59 NYSE: -58.59 Nasdaq: -77.75).
However, the Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, remains bearish at 1.31 as they remain leveraged long.
Meanwhile, this week's contrarian AAII bear/bull ratio (23.33/43.07) moved back into mildly bearish territory while the Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a decline in bears and a lift in bulls, remaining bearish at 15.5/60.8. It continues to suggest an excess of bullish expectations, in our opinion.
Also, the Open Insider Buy/Sell Ratio turned bearish at 24.9 as insiders increased their selling activity.
The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg has lifted slightly to $199.18 per share. As a result, the S&P's forward P/E multiple is 22.0x with the "rule of 20" finding fair value at approximately18.6x.
The S&P's forward earnings yield is 4.5%.
The 10-year Treasury yield closed lower at 1.36% and remains an important factor. We view support as 1.2% and resistance at 1.44%. It remains in a downtrend from its March peak, which we view as a positive for equities regarding the valuation gap.
The combination of poor breadth and the psychology data suggests a higher degree of caution is now warranted. Selectivity continues to intensify.