Damage done.
The charts of the major equity indexes saw further erosion Thursday as most closed below their near-term support levels that left their near-term trends bearish on all but one. Cumulative market breadth remains negative as well.
However, our primary concern about extended market valuation has now seen some relief, as we discuss below. In our opinion, the contraction of the valuation spread for the S&P 500 combined with some oversold conditions for the McClellan OB/OS suggest we may now see a pause in the recent heaviness in the markets.
With that said, the weak charts and breadth need to show some signs of improvement in order for us to be more optimistic beyond our expectations of a pause in the recent slide.
Charts See More Support Levels Violated
Chart Source: Worden
On the charts, all the major equity indexes closed lower Thursday with negative internals on the NYSE and Nasdaq as trading volumes rose on both.
More technical chart damage occurred with the S&P 500 (see above), DJIA, Nasdaq Composite, MidCap 400, Russell 2000 and Value Line Arithmetic Index all closing below support.
The impact was sufficient to place all the charts in near-term bearish trends except for the Nasdaq 100, which stayed neutral.
As well, cumulative market breadth continues to erode with the advance/decline lines for the All Exchange, NYSE and Nasdaq negative.
No stochastic signals were generated.
McClellan OB/OS Suggest Pause
The data dashboard remains largely neutral but with a little improvement in the 1-day McClellan Overbought/Oversold oscillators.
The NYSE and All Exchange 1-day McClellan OB/OS Oscillators are both oversold with the Nasdaq still neutral (All Exchange: -49.69 NYSE: -83.59 Nasdaq: -29).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, dropping to 42%.
The Open Insider Buy/Sell Ratio slipped to 84.9 and stayed neutral although they have been more aggressive on the buy side over the past few sessions.
The detrended Rydex Ratio (contrarian indicator) was unchanged at +0.07, also staying neutral.
Last week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.21, turning mildly bullish from bullish as crowd fear dissipated.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 51%.
Notable Rise in S&P Forward EPS Estimates
Importantly, the forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw a sizable uptick in expectations, rising to $224.49 from $219.85 per share. As such, the valuation gap narrowed, with the S&P's forward P/E multiple dropping to 18.1x versus the "rule of 20" ballpark fair value of 16.7x. In our opinion, it implies some degree of lessening of market risk that has been so prevalent of late.
The S&P's forward earnings yield is 5.53%.
The 10-Year Treasury yield closed lower at 3.35% and below support. It is in a short-term negative trend. We see new support at 3.29% and resistance at 3.46%.
Bottom Line
While the charts and market breadth are in serious need of repair, the notable reduction in the premium spread between forward valuation and ballpark fair value for the S&P 500 combined with the OB/OS levels suggest some pause of the recent market weakness. Yet chart and breadth improvement are necessary.
