All the major equity indexes closed higher on Monday with up volume swamping down volume by more than 14:1 on the NYSE and 6:1 on the Nasdaq as volumes rose on both. Importantly, there were several violations of near-term downtrends on the charts as we now find all but one in neutral versus their prior bearish patterns.
On the data side, most are neutral except for investor sentiment (contrarian indicators), which are at historically high levels of bearish expectations that have a high degree of correlation with past market lows.
Thus, we are becoming a bit more confident in our opinion that there has been enough of a shift on the charts and data to suggest buying market weakness is now appropriate.
More Near-Term Downtrends Violated
Chart Source: Worden
On the charts, all the major equity indexes closed higher Monday with strong market internals on heavier volume as all closed near their intraday highs.
Important technical events were registered with the S&P 500, Nasdaq Composite (see above), Midcap 400, Russell 2000 and Value Line Arithmetic Index all closing above their near-term downtrend lines and are now neutral versus their prior negative trends. Only the Nasdaq 100 remains negative.
Market cumulative breadth also saw some minor improvement with the NYSE A/D turning neutral from negative as the Nasdaq and All exchange remain negative.
No stochastic signals were generated.
We recently discussed the VIX being at a level that has been its peaking point for 2022 and starting to move down. Should volatility decline, it would be bullish for stocks.
Bearish Sentiment Remains at Historical Extremes
The data find the McClellan Overbought/Oversold Oscillators still neutral (All Exchange: +19.3 NYSE: +16.32 Nasdaq: +22.4).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 17% and remains bullish.
The Open Insider Buy/Sell Ratio rose to 70.8, staying neutral.
The detrended Rydex Ratio (contrarian indicator) continues its very bullish signal, lifting only slightly to-3.15. The ETF traders have extremely leveraged short exposure and, in our opinion, are increasing their probability of becoming a bullish catalyst as they are forced to cover.
This week's AAII Bear/Bull Ratio (contrarian indicator) dipped 2.67 and remains at a level of bearish sentiment only surpassed twice in the past two decades, those times being during the banking crisis in 2009 and the Covid pandemic in 2020.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) is 44.7/25.0 and its highest level since 2013.
The AAII Bear/Bull Ratio is 2.67 (very bullish)
Market Valuation
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dropped to $231.76 per share. As such, the S&P's forward P/E multiple is 15.9x and at a very slight discount to the "rule of 20" ballpark fair value of 16.0x.
The S&P's forward earnings yield is 6.3%.
The 10-Year Treasury yield closed higher at 4.02%. We view support as at 3.7% with resistance at 4.09%.
Our Market Outlook
The charts are sending more signals that coincide with investor sentiment, suggesting weakness should be bought as market lows may have been established.
