Market consolidation is not over

Market consolidation is not over

We believe that better buying opportunities are yet to come.

Charts of major stock indices and market breadth weakened.

Furthermore, the market data does not yet suggest that the period of consolidation of rally gains, which we speculate is likely to occur, is complete. Meanwhile, Bloomberg’s 12-month consensus earnings estimates continue to decline.

Checking in the charts

Source: Worden

All major stock indices closed lower on Friday on negative internals as all closed at or near their intraday lows.

The charts saw some technical weakness appear as all but the DJIA (see above) closed below their accelerating uptrend lines, turning all short-term trends into neutral ups with the exception of the DJIA remaining bullish.

Importantly, there were no support breaches.

However, the market’s cumulative breath has also slowed with the advance/decline lines for the All Exchange, NYSE and Nasdaq turning neutral to bullish.

The cautionary bearish stochastic crossover signals fired on the Nasdaq Composite, Nasdaq 100 and Dow Jones Transports on Friday morning were followed by the rest of the indices at Friday’s close.

Digging deeper into the data

McClellan’s overbought/oversold oscillators are neutral and do not yet offer oversold opportunities (All Exchange: -38.58 NYSE: -44.42 Nasdaq: -34.24).

The percentage of S&P 500 issues trading above their 50-day moving averages (a contrary indicator) remains in bearish territory at 88%.

The Open Insider Buy/Sell index rose slightly to 36.0 but remains neutral.

The Rydex Ratio (contrary indicator) has dropped to -0.21 and is also neutral.

Last week’s AAII Bear/Bull Ratio (contrary indicator) moderated further as the crowd turned a little less fearful at 1.28, remaining at a bullish reading.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) also moderated with the number of bears falling and bulls increasing at 27.8/44.4. Its three-week moving average remains bullish at 83.79.

S&P 500 valuation widening

Bloomberg’s 12-month consensus earnings estimate for the S&P 500 continues to slip to $232.88 a share. Thus, the valuation spread remains somewhat wide, in our opinion, with the S&P forward P/E multiple at 18.2x and a premium to the approximate fair value of the “rule of 20” at 17.0x.

The S&P futures yield is 5.51%.

The 10-year Treasury yield closed higher at 2.99% and above resistance. Support is at 2.84% with new resistance at 3.07%.

Our Short-Term Market Outlook

Our concerns discussed here last Friday regarding the potential for some pause/consolidation of the sizeable gains from June’s lows appear to have begun. The charts and data still do not indicate that the consolidation is complete, however. So let’s wait for the charts and dashboard data to provide more positive evidence before we become more bullish as important support levels can be tested.

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