All the major equity indexes closed higher Monday after recovering from some fairly steep intraday losses. All closed at or near their intraday highs. However, there were no alterations regarding their near-term trends that remain overwhelmingly negative.
Still, the fact that losses were reversed to gains is a positive. And while we have yet to see enough evidence that the market correction has bottomed, the data are now suggesting, in our view, that it is time to begin nibbling in equities, especially regarding investor sentiment fear levels.
So, although we do not suggest an "all in" approach, some selective buying may now be appropriate for those with longer-term time horizons.
On the Charts
All the major equity indexes posted gains Monday with generally positive internals, after recovering from some intraday losses that were of some degree of magnitude. The fact that the losses were reversed to gains is obviously encouraging.
However, the strength did not have any impact on their near-term trends, leaving all but the Dow Jones Transports, which is neutral, in short-term downtrends.
Likewise, the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain negative.
The stochastic readings did finally generate a bullish crossover signal for the Nasdaq 100 (see above). We would prefer to see others follow to support the NDX's signal.
As such, the charts remain cautionary.
Market Data Is Suggesting Selective Buying May Now Be Appropriate
The McClellan 1-Day Overbought/Oversold oscillators are oversold on all but the Nasdaq, which is neutral (All Exchange: -50.43 NYSE: -65.84 Nasdaq: -38.04).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 24% and is now bullish as over the past two years said readings have produced rallies five out of six times.
Also, the Open Insider Buy/Sell Ratio rose further to 97.7%. While staying neutral, it shows a continued increase in buying appetite on their part.
Meanwhile, the detrended Rydex Ratio (contrarian indicator) is a bullish -1.85 with the ETF traders leveraged short.
Importantly, this week's AAII Bear/Bull Ratio (contrarian indicator) rose further to a very bullish 2.97 (see below) and at a 20-year peak matched only by the 2008-2009 financial crisis. Crowd fear is at very extreme levels.
The AAII Bear/Bull Ratio is 2.97 (very bullish)
Meanwhile, the Investors Intelligence Bear/Bull Ratio (contrary indicator) is on a bullish signal at 32.9/34.2. Historically, these levels have been buying opportunities for those with longer-term horizons.
S&P 500 Valuation and Treasury Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose to $236.04 per share. Thus, the S&P's forward P/E multiple is 17.6x with the "rule of 20" finding ballpark fair value at 17.0x.
The S&P's forward earnings yield is now 5.68%.
The 10-Year Treasury yield closed higher at 3.0% and at resistance. We view support as 2.5%.
Our Near-Term Market Outlook
While the charts have yet to send a green light, we believe the data now suggest some toe dipping may now be appropriate, particularly for longer-term investors.