As the stock market churns and mills about, where do we stand and how do we play it?
The major equity indexes closed mostly lower on Tuesday with only one managing to post a gain. There were no alterations to the current near-term trends that remain a mix of bullish, bearish and neutral implications. However, three of the indexes did close below their 50-day moving averages.
The data dashboard continues to send a neutral signal, thus lacking any suggestion as to near-term movement probabilities. Our primary concern is still the forward 12-month valuation for the S&P 500.
So, while the release this morning of the August CPI data may have a marked impact on the markets, at this point in time, we have yet to see enough evidence to suggest the recent correction has seen its lows.
Indexes Close Lower with Trends Unchanged
Chart Source: Worden
On the charts, all the major equity indexes closed lower Tuesday except for the MidCap 400, which managed to close in the green. The rest posted losses with negative market breadth.
There were no violations of support or trend. As such, the near-term trends remain bullish on the Nasdaq Composite (see above), bearish on the DJIA, Dow Jones Transports and MidCap 400, with the rest neutral.
However, the S&P 500, Nasdaq Composite and Nasdaq 100 did close below their 50-day moving averages.
Cumulative market breadth is neutral on the NYSE and negative on the All Exchange and Nasdaq.
No stochastic signals were generated.
Data Remains Largely Neutral
The McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: -18.76 NYSE: -16.83 and Nasdaq: -21.03).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator page 9) slipped to 34%, staying neutral.
The Open Insider Buy/Sell Ratio rose to 43.2%, staying neutral as well.
The detrended Rydex Ratio (contrarian indicator) remains neutral and unchanged at 0.93% as the leveraged ETF traders appear to have been "buying the dip" as it edges closer to bearish signal levels.
Leveraged ETF sentiment (contrarian indicator) is 18.2% and also neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) dipped to 0.93, also staying neutral.
The new Investors Intelligence Bear/Bull Ratio (contrary indicator) remains neutral at 48.3%. As such, investor sentiment has become a bit less threatening.
Valuation Extended
Valuation remains a primary concern and extended, in our opinion. The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 declined to $232.60 per share with its forward P/E multiple at 19.2x and still well above the "rule of 20" ballpark fair value at 15.7x. It continues to leave little room for error.
The S&P 500's forward earnings yield is 5.18%.
The 10-Year Treasury yield closed lower at 4.26%. Support is 4.12% with resistance at 4.32%.
Bottom Line
As we wait for the CPI report, we continue to view the weak charts and market breadth combined with overvaluation cautiously for the near term until such evidence is presented to suggest otherwise. Until then, we are evaluating positions on a case-by-case basis while also honoring sell signals.
