The Fed's announcement Wednesday afternoon will likely create some volatility. Nonetheless, we remain of the opinion that the markets are in an improving environment after the losses from the beginning of the year.
Despite Tuesday's market declines, all the index charts remain in near-term uptrends, although some flashed bearish stochastic crossover signals, which we continue to believe should be respected.
The data find the McClellan OB/OS Oscillators that had been overbought and cautionary largely neutral at this stage. And while some of the sentiment indicators have recently moderated, the AAII Bear/Bull Ratio (contrarian indicator) still finds the crowd fearful at 1.86.
Checking Out the Charts
Chart Source: Worden
The major equity indexes closed lower Tuesday on heavier volume and negative internals.
The Nasdaq Composite (see above) and Nasdaq 100 both closed below their support levels. Importantly, however, their near-term uptrend lines remain intact as they do for the rest of the index charts as well.
Market breadth saw some weakening as the cumulative advance/decline lines for the All Exchange and Nasdaq turned neutral from positive with the Nasdaq below its 50-day moving average. The NYSE's remains positive.
Bearish stochastic crossover signals were generated for the S&P 500, Nasdaq Composite and Nasdaq 100.
Digging Into the Data
The McClellan Overbought/Oversold Oscillators are now mostly neutral, after their prior cautionary levels (All Exchange: +29.52 NYSE: +50.19 Nasdaq: +15.81). Only the NYSE remains mildly overbought.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) is neutral, dipping to 52%.
The Open Insider Buy/Sell Ratio nudged up to 43.1, also staying neutral.
The detrended Rydex Ratio (contrarian indicator) dipped to -0.97 and is mildly bullish versus its previous bullish status.
This week's AAII Bear/Bull Ratio (contrarian indicator finds the crowd staying very fearful, at 1.86 and very bullish.
However, the Investors Intelligence Bear/Bull Ratio (contrary indicator) moderated to neutral with the bears and bulls being dead even at 35.2/35.2.
S&P 500 Valuation and Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 continues to decline and is down to $236.42 per share. As such, the S&P's forward P/E multiple is 16.6x with the "rule of 20" ballpark fair value at 17.2x.
The S&P's forward earnings yield rose to 6.03%.
The 10-Year Treasury yield closed lower at 2.79%. We view new support as 2.71% and resistance at 3.04%.
Our Near-Term Market Outlook
Tuesday's declines were not unexpected given the near-term overbought conditions. However, the overbought levels have now largely abated while all the chart near-term trends remain positive, the crowd is still fearful and valuation is trading at a discount. As such, despite the downdraft, the charts and data continue to suggest we are in an improving environment for equities, by our work.