Thursday's market selloff saw all the major equity indexes close at or near their lows of the day, resulting in most violating their support levels and turning trends to near-term negative from neutral.
Meanwhile, we are not yet seeing strong oversold signals, while the valuation gap has narrowed.
As such, while we are not sellers at this stage, enough evidence was generated Thursday, we believe, to suggest holding off on buying weakness until we see the charts and data imply a near-term low has been created followed by some stabilization.
Several Index Trends Turn Near-Term Negative
Chart Source: Worden
On the charts, all the major equity indexes closed lower Thursday with negative NYSE and Nasdaq internals as trading volumes rose on both. All closed near their intraday lows.
The result was the S&P 500, DJIA, Nasdaq 100 (see above), Midcap 400, Russell 2000 and Value Line Arithmetic Index all closed below their respective support levels, turning their near-term trends to bearish from neutral.
Also, the Nasdaq Composite, Nasdaq 100, and Russell 2000 closed below their 50-day moving averages.
Market cumulative breadth also weakened on the All Exchange, NYSE and Nasdaq that turned bearish from neutral.
Stochastic readings are neutral across the board.
We will respect the shift on the chart implications.
Data Remain Mostly Neutral
On the data front, the McClellan Overbought/Oversold Oscillators remain mostly neutral, except for the NYSE being mildly oversold, and not yet sending strong reversal signals (All Exchange: -45.83NYSE: -53.58 Nasdaq: -40.62).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 65%, staying neutral.
The Open Insider Buy/Sell Ratio saw a dip to 60.5%, also remaining neutral.
The detrended Rydex Ratio (contrarian indicator) declined to -0.97 and remains mildly bullish.
This week's AAII Bear/Bull Ratio (contrarian indicator) moved higher to 1.57 as bearish sentiment increased and remains on a bullish signal.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a rise in bears and bulls, staying neutral at 32.9/43.8.
Valuation Gap Narrows But Still Has a Ways to Go
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dropped further to $224.20 per share. As such, its forward P/E multiple slipped to 17.4x, due to market weakness, as its premium narrowed to the "rule of 20" ballpark fair value of 16.6x.
The S&P's forward earnings yield rose to 5.75%.
The 10-Year Treasury yield closed lower at 3.45%. It remains in a negative short-term trend with support at 3.29% and resistance at 3.69%, by our analysis.
Our Near-Term Market Outlook
While we are not sellers, Thursday's market drop shifted the signals. The charts and data moved enough to now suggest postponing our prior view of buying weakness until enough evidence is presented to imply a near-term market bottom has been established and stabilized that would offer a better risk/reward scenario.