With hotter-than-expected CPI numbers released Friday morning putting pressure on stocks, closing prices for the S&P 500 and Nasdaq Composite are key for the markets.
In our view, the S&P needs to stay above 3,950 and the Nasdaq above 11,428 for us to maintain our view that we have already seen the market lows as inflation fears have already likely been factored in.
Let's examine the latest charts and data.
On the Charts
All the major equity indexes closed lower Thursday with negative internals with all closing near their intraday lows.
Damage was strong enough that all closed below their respective support levels except for the Russell 2000.
The Nasdaq 100 (see above), MidCap 400, Russell 200 and Value Line Arithmetic Index reversed their recent shift to near-term bullish back down to neutral.
Market cumulative breadth also sagged with the A/Ds for the All Exchange, NYSE and Nasdaq turning neutral from bullish.
Add to that, each of the indexes registered bearish stochastic crossover signals, suggesting more weakness.
Regarding the Data
All the McClellan 1-Day Overbought/Oversold oscillators dropped back to neutral from overbought (All Exchange: +8.23 NYSE: -11.68 Nasdaq: +20.88).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 22% and below the 25% trigger line, turning bullish.
The Open Insider Buy/Sell Ratio declined slightly to 43.9, staying neutral.
On the other hand, he detrended Rydex Ratio (contrarian indicator) at -1.96 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 1.81, although a bit less so versus last week's 2.18 reading.
The Investors Intelligence Bear/Bull Ratio (contrary indicator), below, also remained on a very bullish signal and still near a decade peak of fear. However, we would note bears declined as bulls increased to 38.0/36.2. 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 38.0/36.2 (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 $236.63 per share. As such, the S&P's forward P/E multiple slipped to 17.0x with the "rule of 20" finding ballpark fair value at 17.0x as well.
The S&P's forward earnings yield is 5.89%.
The 10-Year Treasury yield closed higher at 3.04%. We view support as 2.89% and resistance at 3.07%
Our Near-Term Market Outlook
We have been under the assumption that the worst of the market's declines had been established due to chart and breadth improvements combined with high investor fear and lower valuation. That assumption is now under threat given the CPI numbers and the market's reaction. To maintain our outlook, we believe the S&P 500 and Nasdaq Composite need to close above 3,950 and 11,428, respectively.