In response to the Fed's rate hike all the major equity indexes closed at or near their intraday lows and below what we viewed as important support levels. As such, the charts remain in near-term downtrends with no implications of a reversal on their part.
However, the data is sending a different message.
The McClellan 1-day OB/OS Oscillators are more oversold and in combination with investor sentiment (contrarian indicator, see below) near historically peak levels of bearishness while the percentage of S&P 500 stocks above their 50-day moving average (contrarian indicator) has turned green.
Nonetheless, should a bounce occur, it would take place within established downtrends that still need to be resolved to the upside. Until that resolution occurs, we will remain patient for a more constructive outlook.
Fed Breaks Chart Support Levels
Source: Worden
All the major equity indexes closed lower Wednesday with negative NYSE and Nasdaq internals on higher volume.
All closed at or near their intraday lows as all broke below what we viewed as important support levels, leaving all the near-term trends bearish and lacking signs of reversals.
Cumulative breadth continued to erode with the NYSE, All Exchange, and Nasdaq remaining negative and below their 50-day moving averages.
However, all the stochastic levels are nicely oversold. Yet they have yet to generate actionable bullish crossover signals.
Possible Bounce?
The data, in our opinion, are now suggesting the probability of some pause or possible bounce from the recent weakness.
The McClellan Overbought/Oversold Oscillators are oversold with the NYSE very oversold (All Exchange: -98.26 NYSE: -110.01 Nasdaq: -90.51).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 15% and is now on a bullish signal.
The Open Insider Buy/Sell Ratio lifted to 66.1% but remains neutral.
Importantly, the detrended Rydex Ratio (contrarian indicator) (see below) remains in very bullish territory, dropping to -2.99, a level that has only been exceeded five times in the past 10 years as the typically wrong leveraged ETF traders now have extremely leveraged short exposure.
The Detrended Rydex Ratio Is -2.99 (Very Bullish)
This week's AAII Bear/Bull Ratio (contrarian indicator page 8) rose to 2.27 and is still on a very bullish signal as well with bears outnumbering bulls by more than 2:1.
The Investors Intelligence Bear/Bull Ratio (contrary indicator page 8) is 28.2/32.4 and neutral.
S&P 500 Looks Fairly Valued
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 slipped to $231.19 per share. As such, its forward P/E multiple is 16.4x and at a slight discount to the "rule of 20" ballpark fair value at 16.5x.
The S&P's forward earnings yield is 6.1%.
The 10-Year Treasury yield closed lower at 3.51%. We view support at 3.23% with resistance at 3.65%.
Our Near-Term Stock Market Outlook
The data strongly suggest some easing of the recent pain being inflicted on investors. However, until the charts start telling the story that demand has started to overpower supply, trends should continue to be respected.
