Is the worst of it over?
While the major equity indexes closed lower Monday and several support levels were violated, all closed near the midpoints of the session, suggesting some buyers appeared near the close. Nonetheless, all the indexes remain in near-term bearish trends.
However, the stochastic readings are very oversold with most in single-digits. But it is the data dashboard that we find quite encouraging. It is sending multiple signals implying it's time to put some funds back into equities.
Insiders have notably increased their buying activity as the crowd is terrified and the previously onerous valuation gap has narrowed.
Our discipline suggests there is now a selective buying opportunity at hand.
Indexes Remain Bearish as Data Says 'Buy'
Chart Source: Bloomberg
On the charts, all the major equity indexes closed lower Monday with negative NYSE and Nasdaq internals on heavy trading volume.
All the near-term trends remain bearish and have yet to show signs of reversal while the Dow Jones Transports, Midcap 400, Russell 2000 (see above) and Value Line Arithmetic Index closed below their support levels.
Cumulative market breadth remains bearish as well with the advance/decline lines for the All Exchange, NYSE and Nasdaq negative.
A glimmer of hope is coming from the stochastic reading where several are very oversold but have yet to generate bullish crossover signals.
Despite negative chart implications, multiple data points on our dashboard strongly suggest the worst may be over for the near term and it is time to do some buying.
Multiple Data Points on Green Lights Say It's Time to Put Some $ to Work
Despite negative chart implications, multiple data points on our dashboard strongly suggest the worst may be over for the near term and it is time to do some buying.
The 1-Day McClellan Overbought/Oversold Oscillators are deeply oversold and suggest some near-term strength (All Exchange: -135.90 NYSE: -162.43 Nasdaq: -120.74)
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) remains at 17% and is bullish as well.
% of S&P 500 Stocks Above Their 50 DMAs Is 17% (Bullish)
Importantly, The Open Insider Buy/Sell Ratio rose to 42.1 from 26.5 and turned neutral from bearish as insiders increased their buying in contrast to other selling over the past few weeks.
The detrended Rydex Ratio (contrarian indicator) dropped to -0.38, staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.79 and is now very bullish as the crowd has run for the hills.
The AAII Bear/Bull Ratio Is 1.79 (Very Bullish)
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 24.7/45.2.
Valuation Gap Narrows
The valuation gap between the forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 at $220.35 per share has narrowed with its forward P/E multiple at 17.5x while the "rule of 20" ballpark fair value rose to 16.5x. It remains at a premium but less than has been the case over the past four weeks.
The S&P's forward earnings yield is 5.71%.
We would also note the 10-Year Treasury yield closed lower at 3.51% and below support. It is short-term negative with new support at 3.40% and resistance at 3.62%, by our analysis.
Our Market Outlook
While the charts continue to paint a bleak future, the market's oversold conditions, active insider buying, intense crowd fear and a lessening of risk given the narrowing of the valuation gap with the % 50 well into bullish territory, in combination, are suggesting some selective buying is now appropriate.
