Tuesday's strong rally appears to have confirmed the bottoming "hammer" signals we discussed here yesterday.
All the major equity indexes closed at or near their highs of the day with the charts seeing multiple technical improvements as the markets responded to the wash-out of sellers in the prior session as noted by the "hammer" formations. All the index charts are now neutral as a result.
Now let's see where we may be headed next.
On the Charts
Only the Dow Jones Transports closed lower Tuesday as the rest of the major equity indexes saw strong performance with positive internals on the NYSE and Nasdaq. All closed near their highs of the day as buyers held into the close after what appears to have been a selling climax in the prior session as noted by their "hammer" signals we discussed here Tuesday.
The charts saw several improvements:
- The Nasdaq Composite (see above) and Nasdaq 100 both closed above resistance and are now in neutral trends as they also flashed bullish stochastic crossover signals.
- The S&P 500 lifted to neutral as it closed above its downtrend line and 50-day moving average.
- The Russell 2000 and Value Line Arithmetic Index closed above their downtrend lines while the Value Line closed above resistance and its 50 DMA.
As such, all the equity charts are now in near-term neutral trends.
Cumulative market breadth improved on the NYSE, turning positive from neutral while the All Exchange turned neutral from negative. The Nasdaq A/D remains in a downtrend at this point.
The McClellan 1-Day Overbought/Oversold Oscillators are still neutral after the strong gains (All Exchange: +15.76 NYSE: +29.46 Nasdaq: +4.94).
The percentage of S&P issues issues trading above their 50-day moving averages rose to 65% and remains neutral as the Open Insider Buy/Sell Ratio slipped to 34.3, staying neutral as well.
The detrended Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, rose slightly to 0.96, staying neutral as they remained skeptical of the rally.
This week's contrarian AAII Bear/Bull Ratio rose to 0.95 turning neutral from bullish. The Investors Intelligence Bear/Bull Ratio (23.5/50.6) (contrary indicator) remains neutral although the number of bullish advisors declined.
Valuation and Yields
The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg dipped to $222.22 per share. As such, the S&P's forward P/E multiple is 21.2x with the "rule of 20" finding ballpark fair value at 18.3x.
The S&P's forward earnings yield is 4.72%.
The 10-Year Treasury yield slipped to 1.75%. We view support for the 10-Year at 1.60% with resistance at 1.85%.
Tuesday's strong rally appears to have confirmed the bottoming "hammer" signals in our last article. With the chart and breadth improvements and the data not flashing any red signals at this point, we maintain our near-term macro-outlook for equities at "positive."