Market Psychology Data Positive as Insiders Buy with the Crowd Very Bearish

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While some rays of light are peaking through the clouds, we believe further improvement is required to be more confident in a positive turn for the market.

Several equity indexes managed to close above their accelerated downtrend lines Tuesday, turning their trends to neutral from bearish. However, we need more convincing on the charts that a positive shift is occurring. 

On the Charts

Chart Source: Worden

All the major equity indexes closed higher Tuesday with positive internals on lighter volume. Most closed near their midpoints of the session.

Some charts improved as the S&P 500 (see above), DJIA, Nasdaq Composite, Nasdaq 100, MidCap 400 and Value Line Arithmetic Index all closed above their accelerated downtrend lines and are now neutral versus bearish.

The Dow Jones Transports and Russell 2000 remain bearish.

However, the chart improvements are not thoroughly convincing as higher highs and higher lows have yet to be seen.

Market breadth saw some improvement as well with the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq turning neutral from bearish.

Stochastic levels remain oversold and lack bullish crossover signals.

Digging Into the Market Data

The McClellan Overbought/Oversold Oscillators are all neutral (All Exchange: -2.73 NYSE: -25.98 Nasdaq: +15.2).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) lifted to 4% and well below the 25% trigger line, remaining bullish.

The Open Insider Buy/Sell Ratio rose again to 104.7 as insiders continued their buying during the past week.

On the other hand, the detrended Rydex Ratio (contrarian indicator) remains very bullish at -2.53 as the leveraged ETF traders are highly leveraged short.

This week’s AAII Bear/Bull Ratio (contrarian indicator) remains very bullish at 1.97 as the crowd remains fearful.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remains on a very bullish signal and still near a decade peak of fear at 42.7/29.4. Such extreme levels of investor fear have typically presaged notable market rallies.

The Investors Intelligence Survey is 42.7/29.4 (very bullish)

S&P 500 Valuation and Treasury Yields

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 has dropped to $236.34 per share. As such, the S&P’s forward P/E multiple is down to 15.9x and at a discount to the “rule of 20”, which finds ballpark fair value at 16.7x.

The S&P’s forward earnings yield is 6.28%.

The 10-Year Treasury yield closed higher at 3.31%. We view support as 3.0% and new resistance at 3.51%.

Our Near-Term Market Outlook

While the charts and market breadth saw improvement, offering some encouragement, they were not quite strong enough to become convincing. Meanwhile, sentiment and valuation suggest upside. Still, we believe further chart and breadth strength is necessary to be more confident that a positive market turn is imminent.