All the major equity indexes posted notable losses Monday, breaking support by a wide margin that turned all the near-term trends bearish from neutral. What's more, the charts have yet to suggest an abatement of selling pressure.
On the bright side, the 1-day McClellan Oscillators are oversold and the new contrarian investor sentiment numbers find the already elevated fear levels increasing.
In our opinion, the current bearish chart trends should be respected until violations of resistance, downtrend lines and stronger breadth are registered.
On the Charts
All the major equity indexes closed lower Monday with broadly negative internals on heavy trading volume.
All closed below support that resulted in turning all the prior near-term trends from neutral to bearish.
Cumulative market breadth contracted as well as the advance/decline lines for the All Exchange NYSE and Nasdaq also turned bearish.
Several of the charts are oversold on their stochastic readings but none have yet generated bullish crossover signals.
Our primary focus is on the charts and breadth that both require improvement before becoming more optimistic, in our view.
All the McClellan 1-Day Overbought/Oversold oscillators are oversold with the NYSE very oversold (All Exchange: -89.37 NYSE: -116.35 Nasdaq: 72.52).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 4% and well below the 25% trigger line, remaining bullish.
The Open Insider Buy/Sell Ratio increased to 55.1, staying neutral.
On the other hand, he detrended Rydex Ratio (contrarian indicator) at -1.93 remains in bullish territory as the leveraged ETF traders are still highly leveraged short.
This week's AAII Bear/Bull Ratio (contrarian indicator) remains very bullish at 1.89.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remained on a very bullish signal and still near a decade peak of fear at 40.0/35.72. We repeat, only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms.
The Investors Intelligence Survey is 40.0/35.7 (very bullish)
S&P 500 Valuation and Treasury Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose to $236.84 per share. As such, the S&P's forward P/E multiple dropped to 15.8x and at a discount to the "rule of 20" finding ballpark fair value at 16.6x.
The S&P's forward earnings yield is 6.32%.
The 10-Year Treasury yield closed higher at 3.37% and above resistance. We view support as 3.0% and new resistance at 3.51%.
Our Near-Term Market Outlook
While the data are sending some encouraging signals and valuation becomes further compressed, we believe fighting the current chart trends as unwise. Both the trends and breadth require improvement. Meanwhile, as long as the 10-Year yield rises, it will put pressure on forward valuation even as it trades at a discount to ballpark fair value. Caution is the better part of valor.