Saturday, June 3, 2023

Near-Term Outlook Turns “Neutral/Negative” |


McClellan 1-Day OB/OS Oscillators Oversold But Breadth Weakens Further

The major equity indexes closed mixed yesterday with negative internals on the and as trading volumes rose on the NYSE and declined on the NASDAQ from the prior session.

One index chart turned negative from neutral while another gave a bearish stochastic crossover signal. What is getting the primary focus of our attention is the continuing deterioration of market breadth. Our daily review of approximately 1,600 stock charts is in concert with the NASDAQ cumulative A/D line making a lower low as is the All Exchange with both below their 50 DMAs.

Our recent comments about market selectivity have reached a tipping point, in our opinion, suggesting the market’s internal structure has weakened to an unhealthy state. When combined with the psychology data, we now believe it appropriate to shift our near-term macro-outlook for equities from “neutral/positive to “neutral/negative.”

While the , , and advanced, with the NDX posting a new closing high, the rest declined with the RTY turning negative as it closed below its support as the COMPQX give a bearish stochastic crossover signal.

  • The trends now find the SPX, DJI, COMPQX and NDX in uptrends with the and VALUA neutral. The DJT and RTY are now in near-term bearish trends.
  • We would draw attention to the deterioration of market breadth that is now, in our view, in an unhealthy state to the degree that we believe market advances may become increasingly more difficult. Of note is the NASDAQ A/D making a lower low.
  • While some individual names may continue to advance, an increasing majority are going in the opposite direction.

The data finds all the McClellan 1-Day OB/OS in oversold territory and may offer a cushioning effect near term (All Exchange: -69.59 NYSE: -58.59 NASDAQ: -77.75).

  • However, the Rydex Ratio (contrarian indicator) measuring the action of the leveraged ETF traders remains bearish at 1.31 as they remain leveraged long.
  • As well, this week’s contrarian AAII bear/bull ratio (23.33/43.07) moved back into mildly bearish territory while the Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a decline in bears and a lift in bulls, remaining bearish at 15.5/60.8. It continues to suggest an excess of bullish expectations, in our opinion.
  • Also, the Open Insider Buy/Sell Ratio turned bearish at 24.9 as insiders increased their selling activity.
  • Valuation finds the forward 12-month consensus earnings estimate from Bloomberg lifting slightly to $199.18 for the SPX. As a result, the SPX forward multiple is 22.0 with the “rule of 20” finding fair value at approximately18.6.
  • The SPX forward earnings yield is 4.5%.
  • The closed lower at 1.36 and remains an important factor. We view support as 1.2% and resistance at 1.44%. It remains in a downtrend from its March peak that we view as a positive for equities regarding the valuation gap.

In conclusion, the combination of poor breadth and the psychology data suggest a higher degree of caution is now warranted. Selectivity continues to intensify.

SPX: 4,295/NA  DJI: 34,570/NA  COMPQX: 14,356/NA    NDX: 14,485/NA                         

DJT: 14,247/14,905  MID: 2,650/2,716   RTY: 2,180/2,225     VALUA: 9,461/9,672

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