Our net takeaway from Tuesday's market action is that despite the gains achieved, we have not seen sufficient evidence to alter our near-term "neutral/negative" macro-outlook for equites.
In our view, the charts and data have yet to register signals typically associated with correction bottoms.
On the Charts
All the major equity indexes closed higher Tuesday with positive internals on the NYSE and Nasdaq although trading volumes were below those of the previous negative session. Most closed near the midpoints of their intraday ranges.
On a positive note, the DJIA and Dow Jones Transports both managed to close above their short-term downtrend lines and are now neutral versus their prior bearish trends. Also, the Dow Transports closed above resistance.
So, we find the S&P 500 (see above), Nasdaq Composite and Nasdaq 100 staying in near-term bearish trends with the remaining indexes neutral.
Cumulative market breadth, unfortunately, was not affected by Tuesday's strength as the advance/decline lines for the All Exchange, NYSE and Nasdaq remain negative and below their 50-day moving average.
The S&P, Nasdaq Composite and Nasdaq 100 did register bullish stochastic crossover signals but are not yet actionable, in our opinion.
The data finds the McClellan 1-Day Overbought/Oversold Oscillators remaining neutral and yet to enter oversold territory within the recent market declines (All Exchange: -5.9 NYSE: -1.66 Nasdaq: -9.16).
The detrended Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, dipped to 0.73 and remains neutral versus its bearish implications prior to the current correction.
The Open Insider Buy/Sell Ratio is still neutral at 35.7 as of its last reading.
This week's contrarian AAII Bear/Bull Ratio (39.73/26.8) turned mildly bullish as bearish sentiment increased while the bulls waned. That "crowd" is now nervous. The Investors Intelligence Bear/Bull Ratio (22.1/46.5) (contrary indicator) was little changed and remains neutral.
Valuation and Yields
The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg lifted to $212.78 per share. As such, the S&P's forward P/E multiple is 20.4x with the "rule of 20" finding fair value at approximately 18.5x.
The S&P's forward earnings yield is 4.9%.
The 10-Year Treasury yield rose to 1.53% and is now challenging what we see as resistance at 1.55%. A violation of said resistance could prove problematic for equities, in our view. We see support remaining around 1.38%.
Tuesday's action did not present enough evidence to warrant a change in our near-term "neutral/negative" macro-outlook for equities despite the strength. Chart trends, negative cumulative breadth and the data remain rather cautionary as signs associated with correction bottoms have yet to appear.