How do we interpret this week's declines, specifically on Wednesday?
Importantly, in our view, no support levels were violated Wednesday, nor have they been throughout this week's slippage. We view this action as a normal partial retracement of the substantial gains from the October lows thus far.
As such, we remain generally constructive in our outlook and continue to believe buying weakness near support as the best approach.
Now, let's take a close look at the charts and data.
All Support Levels Hold on Weakness
Chart Source: Worden
On the charts, all the major equity indexes closed lower Wednesday with negative NYSE and Nasdaq internals on lighter volume.
Importantly, in our opinion, no support levels were violated and have stayed intact throughout the week's declines while the near-term trends remain neutral across the board.
In fact, the S&P 500, Nasdaq 100 (see above) and Dow Jones Transports closed at support.
As noted above, thus far the action appears to be a consolidation of sizable gains from the October lows.
The cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain neutral as well.
We would also note the stochastic levels that flashed bearish crossover signals from overbought conditions at the week's start are now oversold on the Dow Transports and Russell 2000 with the rest very close to doing the same.
Data Remain Largely Neutral With Some Stochastic Levels Now Oversold
On the data front, the bulk remains neutral.
The McClellan Overbought/Oversold Oscillators remain neutral (All Exchange: -30.99 NYSE: -31.80 Nasdaq: -31.04).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) was unchanged and at 78%. While still in its upper ranges, it is no longer on its prior caution signal.
The Open Insider Buy/Sell Ratio rose slightly to 47.0, staying neutral.
The detrended Rydex Ratio, (contrarian indicator) was also unchanged at -0.76, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) is lower at 1.39 but remains bullish.
Also, the Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a rise in bears and drop in bulls at 31.5/38.4, remaining neutral with bulls outnumbering bears.
Valuation Gap Narrows
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose slightly to $225.52 per share. As such, its forward P/E multiple stands at 17.4x while remaining at a narrower premium to the "rule of 20" ballpark fair value of 16.6x.
The S&P's forward earnings yield rose to 5.73%.
The 10-Year Treasury yield closed lower at 3.41% and below support. It is in a downtrend with new support at 3.29% with resistance now at 3.69%.
Our Market Outlook
We believe the charts show a normal consolidation of gains while the prior cautionary data has moderated as the valuation premium has declined. Thus, we remain buyers of weakness near support.