As the debt-ceiling debate remains in a quagmire and unresolved, markets continue to react to various updates and words characterizing the current tenor of the negotiations.
Near-term trends for the major equity indexes remain mixed (see below).
On the data front, except for the high level of investor fear (contrarian indicator), indicators are largely neutral, which continues to be counterbalanced, in our opinion, by the extended valuation for the S&P 500.
We believe any buying should be done on a very selective basis until evidence appears to suggest otherwise.
Indexes Post Losses but Leave Trends Unchanged
Chart Source: Worden
On the charts, all the major equity indexes closed lower Tuesday and near session lows with negative market internals and on higher volume.
The weak session saw the DJIA close below its 50-day moving average and the Midcap 400 close below support.
However, all the near-term chart trends stayed intact with the S&P 500, Nasdaq Composite (see above), Nasdaq 100 and Russell 2000 in uptrends, the Dow Jones Transports negative and the rest in neutral sideways patterns.
Cumulative market breadth saw some slight deterioration with the NYSE A/D turning neutral from bullish while the All Exchange and Nasdaq remained bullish.
Some stochastic warning signals were finally generated with the S&P, Russell and Value Line Arithmetic Index registering bearish crossover signals that suggest the potential for some further weakness, in our view.
Most Data Stay Neutral
The data dashboard remains largely neutral, still yielding no strong near-term directional implications.
The 1-day McClellan Overbought/Oversold Oscillators are all neutral (All Exchange: +13.30 NYSE: -7.58 Nasdaq: +27.64).
The % of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, dropping to 41%.
The Open Insider Buy/Sell Ratio dipped to 63.8. It also remains neutral.
The detrended Rydex Ratio (contrarian indicator) rose to +0.37, also staying neutral.
Of note, this week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.65 and remains very bullish. In our view, it remains the one bright spot on the data dashboard.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 24.7/45.26%.
Valuation Spread Remains Wide
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw a minor lift to $223.32 per share. However, the valuation gap remains wide and is still disconcerting with the S&P's forward P/E multiple at 18.6x versus the "rule of 20" ballpark fair value of 16.3x, suggesting valuation is extended.
Its forward earnings yield is 5.36%.
The 10-Year Treasury yield closed lower at 3.7%. It is in a short-term bullish trend. We see support at 3.56% and resistance at 3.81%.
Bottom Line
With the debt ceiling unresolved and hanging over the markets, it is our view that the mixed index trends, generally neutral data and some cautionary stochastic signals, while valuation remains extended, imply that any buying should be done on a very selective basis until proven otherwise.
