All the major equity indexes closed lower Wednesday, leaving the index chart trends a mixed bag while cumulative market breadth remains weak.
The data are still sending mostly neutral signals for the near term. However, forward valuation for the S&P 500 remains very extended. It continues to be a primary concern for us in the face of rising interest rates.
We remain cautious for the short term as we have yet to see sufficient evidence that would imply the recent correction has seen its lows.
Dow Industrials and Transports Break Support
Chart Source: Worden
On the charts, all the major equity indexes closed lower Wednesday with negative internals on lighter trading volumes.
Most closed near their session lows that saw the DJIA (see above) and Dow Jones Transports close below their respective support levels while the S&P 500 closed below its 50-day moving average.
So only the Nasdaq Composite is in a near-term bullish trend with the DJIA, Dow Transports and MidCap 400 bearish and the rest neutral.
Cumulative market breadth continued to weaken with the advance/decline lines for the All Exchange, NYSE and Nasdaq bearish and below their 50 DMAs.
Also, the S&P 500 generated a bearish stochastic crossover signal.
Data Largely Neutral
The McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: -13.46 NYSE: -15.47 and Nasdaq: -12.359).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 34%, staying neutral.
The Open Insider Buy/Sell Ratio slipped to 40.2%, staying neutral as well.
The detrended Rydex Ratio (contrarian indicator) remains neutral but rose to 0.93% as the leveraged ETF traders appear to be "buying the dip" as it edges closer to bearish signal levels.
Leveraged ETF sentiment (contrarian indicator) slipped to 23.9% and is also neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 0.99, also staying neutral.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) shifted to neutral from a bearish signal at 20.8/43.1.
As such, investor sentiment has become a bit less threatening.
Valuation a Primary Concern
Valuation remains a primary concern and extended, in our opinion. The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 slipped slightly to $232.52 per share with its forward P/E multiple at 19.2x and still well above the "rule of 20" ballpark fair value at 15.7x. It continues to leave little room for error.
Its forward earnings yield is 5.21%.
The 10-Year Treasury yield closed higher at 4.29%. Support is 4.12% with resistance at 4.32%.
As the market's internals and technical status have seen some deterioration, we see valuation as still being extended while there has yet to be enough evidence presented that would suggest that the current correction is complete. We remain cautious while honoring sell signals on individual names.