How much damage was inflicted by the Federal Reserve Wednesday? You may be surprised by the answer.
The major equity indexes cratered after the Fed rate decision and press conference, However, the McClellan 1-day OB/OS Oscillators that were very overbought, and sending warning signals, were cut in half as of Thursday morning. In our view, that weakens its prior very cautionary signals.
So, while investor sentiment (contrarian indicator) is extremely bearish, we continue to believe buying weakness near support is appropriate.
Now, let's take a close look at the charts and data.
Most Indexes Near-Term Bullish Despite Slide
Chart Source: Worden
On the charts, the major equity indexes closed lower Wednesday with broadly negative internals on the NYSE and Nasdaq on heavy volume as selling intensified after Fed Chair Powell's news conference.
All closed at or near their intraday lows with multiple negative chart events generated.
The S&P 500, Nasdaq Composite, Nasdaq 100 (see above), MidCap 400 and Dow Jones Transports closed below support.
Also, the S&P, Nasdaq Composite and Nasdaq 100 closed below their near-term uptrend lines and are now neutral as the rest remain in their near-term uptrends.
Market cumulative breadth weakened as well with the advance/decline lines for the All Exchange, NYSE and Nasdaq turning neutral from bullish.
Bearish stochastic crossovers were registered on the S&P 500, Dow Jones Transports and Russell 2000, adding to the deterioration.
McClellan OB/OS Oscillators Moderate
The McClellan Overbought/Oversold Oscillators that were deeply overbought and sending cautionary signals suggesting consolidation, were cut in half as a result of the notable weakness Wednesday. In our opinion, that lessens the potentially negative pressure in the very near term. Only the NYSE OB/OS remains overbought with the All Exchange mildly so while the Nasdaq is back in neutral territory (All Exchange: +50.59 NYSE: +63.97 Nasdaq: +42.331).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 49%, staying neutral.
The Open Insider Buy/Sell Ratio slipped to 39.5, also staying neutral.
The detrended Rydex Ratio, (contrarian indicator) deepened to -1.73 as leveraged short-sellers remain very leveraged short, continuing its bullish signal.
This week's AAII Bear/Bull Ratio (contrarian indicator) dipped to 2.27 but also remains on a very bullish signal as does this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) at 38.5/36.9 as bears dropped and bulls rose but remains on its bullish signal.
Market Valuation and Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 has dipped to $227.84 per share. As such, the S&P's forward P/E multiple is 16.5x and at a lower premium to the "rule of 20" ballpark fair value of 15.9x.
The S&P's forward earnings yield is 6.06%.
The 10-Year Treasury yield closed higher at 4.06%. We continue to view support as 3.85% with resistance at 4.43%.
Our Market Outlook
Wednesday's carnage left some stripes on the index charts. However, as most charts remain in uptrends with lighter OB/OS levels, we believe buying weakness near support remains appropriate.
