We have been waiting for signals like this before getting more optimistic about this market. Thursday accomplished that requirement, in our view, with the major surge in stocks and multiple bullish technical signals registered across the board (see below).
Here's why we now believe it is appropriate to begin doing some toe dipping on the long side.
Multiple Bullish Engulfing Patterns Registered
Chart Source: Worden
On the charts, all the major equity indexes closed higher Thursday with positive NYSE and Nasdaq internals on notably strong volume.
All closed at or near their intraday highs with the following bullish technical events being registered:
1. The S&P 500 (see above), DJIA and Russell 2000 closed above resistance.
2. The DJIA and Dow Jones Transports closed above their near-term downtrend lines, turning neutral from bearish.
3. All the indexes saw "bullish engulfing patterns" plotted. Said patterns occur when a stock or index posts a lower low and a higher high than the prior session's range while closing near the highs, thus "engulfing" the entire trading range of the previous session. It implies a shift in the supply/demand dynamic to the demand side.
4. Cumulative market breadth, however, remains negative and below the 50-day moving averages on the All Exchange, NYSE and Nasdaq.
5. The S&P, Nasdaq Composite and Nasdaq 100 all saw bullish stochastic crossover signals triggered.
Crowd Remains Terrified
The data find the McClellan Overbought/Oversold Oscillators back at neutral (All Exchange: -3.39 NYSE: -11.93 Nasdaq: +2.57).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 16% and remains bullish.
The Open Insider Buy/Sell Ratio rose as well to 66.6, staying neutral.
The detrended Rydex Ratio, (contrarian indicator), intensified its very bullish signal dropping to -3.25. The ETF traders extended their leveraged short exposure and, in our opinion, could provide a strong catalyst to the upside.
The detrended Rydex Ratio is -3.25 (very bullish)
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 2.87 and is now at a level of bearish sentiment only surpassed twice in the past two decades, those times being during the banking crisis in 2009 and the Covid pandemic in 2020.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is 41.8/25.4 and also near peak levels.
Market Valuation Trading a Discount
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dropped to $232.04 per share. As such, the S&P's forward P/E multiple is 15.8x and at slight discount to the "rule of 20" ballpark fair value of 16.1x.
The S&P's forward earnings yield is 6.32%.
The 10-Year Treasury yield closed higher at 3.95%. We view support as at 3.5% with resistance at 4.0%.
Near-Term Market Outlook
Thursday's action finally provided some of the positive signals we believed were necessary in order to become more optimistic regarding near-term market action. Toe dipping can begin.
