Sentiment Indicators Prove Out On Strong Rally


All Index Charts & Breadth See Improvement

All the major equity indexes closed notably higher yesterday with positive internals on the and as trading volumes rose on both exchanges. All closed at or near their highs of the day with substantial gains. The near-term trends turned neutral from negative as well as all saw multiple technical improvements. On the data side, the surge left the McClellan OB/OS oscillators still in neutral territory and lacking cautionary overbought levels. In our opinion, what may be of greatest import is the fact that yesterday’s gains still find the crowd at extreme levels of fear. The detrended Rydex ratio that forecasted yesterday’s gains still finds the ETF traders very heavily leveraged short. As such, while some backing and filling of yesterday’s moves is likely, we now have a greater degree of confidence that the recent correction has likely been exhausted. Our suggestion of doing some nibbling in stocks two days ago remains intact with the caveat that it would be best to buy on weakness.

On the charts, all the major equity indexes closed higher yesterday with positive internals on the NYSE and NASDAQ on higher trading volumes.

  • The sizable gains moved every index except the RTY above resistance while all but the NDX closed above their near-term downtrend lines.
  • Also, the DJT closed above its 50 DMA.
  • As such, every index is now in a neutral sideways trend except the NDX that is negative.
  • Cumulative breadth finally improved as well with the A/Ds for the All Exchange, NYSE and NASDAQ turning neutral from negative.
  • Also, every index generated a bullish stochastic crossover signal with the exception of the DJT that did so in mid-April.

The data finds the McClellan 1-Day OB/OS oscillators remaining neutral despite yesterday’s strength (All Exchange: +22.28 NYSE: +23.13 NASDAQ: +22.85).

  • The % of SPX issues trading above their 50 DMAs (contrarian indicator) lifted to 47%, also staying neutral.
  • The Open Insider Buy/Sell Ratio dipped to 92.04, remaining neutral post their recent active buying activity.
  • What we believe may be the most important data factor for the near-term is the detrended Rydex Ratio that remains very bullish at -2.41. While dipping slightly, it still finds this contrarian indicator with the leveraged ETF traders highly leveraged short. We repeat, the insider/Rydex dynamic at these levels has frequently resulted in powerful market rallies like the one achieved yesterday.
  • As well, this week’s AAII Bear/Bull Ratio (contrarian indicator) rose further to a very bullish 2.97 and at a 20-year peak matched only by the 2008-2009 financial crisis. Crowd fear is at very extreme levels.
  • Also, the Investors Intelligence Bear/Bull Ratio is on a bullish signal at 32.9/34.2.
  • The forward 12-month consensus earnings estimate from Bloomberg for the SPX slipped to $235.9. Thus, the SPX forward multiple is 18.2 with the “rule of 20” finding ballpark fair value at 17.1.
  • The SPX forward earnings yield is now 5.48%.
  • The closed lower at 2.92% despite the Fed’s rate hike yesterday. We view support as 2.5%and resistance at 3.0%.



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