All the major equity indexes closed broke below their respective support levels on Monday. Indeed all their near-term trends were bearish as of the close.
Yet, while the charts look awful, several of the data levels are sending very strong positive signals suggestive of upside relief. including the OB/OS oscillators and historically significant investor sentiment fear levels.
However, while the data is flashing some bright green lights, the charts have yet to reverse their negative trends. Closes above resistance and downtrends are necessary, in our opinion, to act on the data signals.
The strong trading Tuesday morning need to hold through the day with some degree of follow through.
All Indexes Break Support Again
On the charts, all the major equity indexes closed lower Monday with breath and up/down volumes highly skewed to the negative as all closed below support.
All the downtrend lines remain intact with the Dow Jones Transports (see above) now joining the rest of the charts.
Market breadth continued to sink as well with the cumulative advance/decline lines remaining negative and below their 50-day moving averages for the All Exchange, NYSE and Nasdaq as they made lower lows.
Stochastic levels are oversold buy lack bullish crossover signals.
Data Flashing Some Very Bullish Signals
The McClellan 1-Day Overbought/Oversold oscillators are nicely oversold and suggesting a bounce (All Exchange: - 93.71 NYSE: -98.71 Nasdaq: -90.04).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 20% and is now on a bullish signal.
The Open Insider Buy/Sell Ratio dipped to 80.2%, remaining neutral. However, they have been relatively active buyers over the past several sessions.
The most encouraging data factor for the near-term, in our view, remains the investor sentiment data (contrarian indicators), which are at historically high levels of bearish expectations.
The detrended Rydex Ratio (contrarian indicator) remains very bullish at -2.75. As its chart shows, only five times in the past decade have the ETF traders been so heavily leveraged short, all of which were followed by rallies.
The detrended Rydex Ratio is -2.75 (very bullish)
Meanwhile, this week's AAII Bear/Bull Ratio (contrarian indicator) is at a very bullish 2.75 and at a 20-year peak matched only by the 2008-2009 financial crisis as investment banks collapsed.
Also, the Investors Intelligence Bear/Bull Ratio (contrary indicator) is on a very bullish signal and at a decade peak of fear at 39.3/30.9. Crowd fear is at very extreme levels.
S&P 500 Valuation and Treasury Bond Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 lifted to $235.63 per share. Thus, the S&P's forward P/E multiple is 16.9x and now in line with the "rule of 20" finding ballpark fair value at 16.9x.
The S&P's forward earnings yield is 5.9%.
The 10-Year Treasury yield closed lower at 3.08%. We view support as 2.5% and new resistance at 3.2%.
My Near-Term Outlook
The data says it's time to get back on the horse, especially for long-term investors. However, the lack of validation from the charts has yet to say it's safe to go back in the water for the shorter term. Breadth and chart improvement are essential to give the data more credibility regarding their implications.