While the Nasdaq is spiking, largely due to the earnings results of one company, Nvidia (NVDA) , we continue to see the weight of the evidence as suggesting any buying should be done on a very selective basis as the markets await a resolution on the debt-ceiling drama.
Several negative technical events were generated Wednesday on the charts of the major equity indexes, with multiple support levels being violated that weakened the near-term trends on four of the indexes. And as some charts weakened, so did cumulative market breadth while more bearish stochastic crossovers were generated
On the data front, it continues to send a generally neutral message except for the AAII Bear/Bull Ratio (contrarian indicator), which still shows a significant level of fear among investors. Valuation also continues to be an issue (see below).
Charts & Breadth Weaken
Chart Source: Worden
On the charts, all the major equity indexes closed lower Wednesday with negative NYSE and Nasdaq internals on lighter volume. They closed in a mix of near their intraday lows and midpoints.
Negative technical events were generated with the S&P 500, DJIA, Dow Jones Transports, Midcap 400 and Value Line Arithmetic Index closing below support.
The impact on near-term trends finds the Nasdaq Composite and Nasdaq 100 (see below) still bullish with the DJIA, Dow Transports and MidCap 400 bearish and the rest neutral.
Cumulative market breadth weakened as well that now finds the advance/decline lines for the All Exchange, NYSE and Nasdaq neutral versus their prior bullish slopes.
Also, bearish stochastic crossover signals were generated on the Nasdaq Composite and Nasdaq 100.
Most Data Stays Neutral
The data dashboard remains largely neutral, still yielding no strong near-term directional implications.
The 1-day McClellan Overbought/Oversold Oscillators are all neutral (All Exchange: -20.67 NYSE: -45.88 Nasdaq: -4.02).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, dropping to 32%.
The Open Insider Buy/Sell Ratio rose slightly to 64.0. It also remains neutral.
The detrended Rydex Ratio (contrarian indicator) slipped to +0.21, also staying neutral.
Of note, this week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.65 and remains very bullish. In our view, it remains the one bright spot on the data dashboard.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 24.7/45.26%.
Valuation Spread Remains Wide
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 slipped to $223.25 per share. As such, the valuation gap remains wide and is still disconcerting with the S&P's forward P/E multiple at 18.5x versus the "rule of 20" ballpark fair value of 16.3x, suggesting valuation is extended.
The S&P's forward earnings yield is 5.4%.
The 10-Year Treasury yield closed higher at 3.72%. It is in a short-term bullish trend. We see support at 3.56% and resistance at 3.81%.
Bottom Line
The very strong Nasdaq response Thursday is largely due to the move in Nvidia on reporting very strong earnings. However, the general market has seen some weakening breadth and chart patterns while the data remain generally benign. Thus, buying should remain very selective.
