Fed Chair Powell "swung the wrecking ball" on Tuesday and it wasn't pretty.
All the major equity indexes closed near their intraday lows with three indexes violating support, turning their near-term trends bearish. Cumulative market breadth weakened as well.
On the data side, any positive implications from overbought readings are counterbalanced by increased insider selling and the forward valuation of the S&P 500 remaining stretched.
Now, let's dig deeper and consider the implications going forward.
Index Charts & Market Breadth Weaken
Chart Source: Bloomberg
On the charts, all the major equity indexes closed lower Tuesday with negative internals on the NYSE and Nasdaq.
The close found all near their session lows that resulted in the MidCap 400, Russell 2000 (see above) and Value Line Arithmetic Index violating support and turning their near-term trends to bearish from neutral. The rest remain neutral.
Also, market cumulative breadth turned bearish for the All Exchange, NYSE and Nasdaq.
In short, a notable amount of technical damage was registered during the session.
No stochastic signals were generated.
Insiders Keep Selling
On the data dashboard, the 1-Day McClellan Overbought/Oversold Oscillators dropped back into oversold territory that would usually offer some expectations of strength (All Exchange: -62.13 NYSE: -73.30 Nasdaq: -55.7).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 36% and remains neutral.
The problem is the Open Insider Buy/Sell Ratio remains a major concern as insiders continued to increase their selling activity to a bearish 16.1. Their persistent selling into weakness instead of buying is quite worrisome.
The Open Insider buy/sell ratio is 16.1% (bearish)
The detrended Rydex Ratio (contrarian indicator) slipped to -0.17 and is neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.42 as bearish sentiment saw a sizable increase, and is now bullish.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 28.8/38.4.
Valuation Remains Problematic
Valuation remains problematic as the forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 dropped again to $220.27 per share. It continues to be a problem as the S&P's P/E multiple remains at a significant premium of 18.1x versus the "rule of 20" ballpark fair value at 16.0x. Said valuation, in our opinion, still suggests a high level of potential risk exists.
The S&P's forward earnings yield is 5.53%.
The 10-Year Treasury yield closed unchanged at 3.98%. It is short-term neutral with support at 3.90% and resistance at 4.13%, by our analysis.
Our Market Outlook
As has been the case for the past several sessions, insider selling activity and overvaluation suggest more patience is required to be confident the current correction has been completed. We would now add the weakening charts and market breadth to those concerns. We need evidence to suggest otherwise.
