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Friday’s poor market performance indicates our assumption that the correction had been completed was wrong and premature. Important chart recovery action is now needed to bring the idea back to a point of some credibility.

All the major equity indexes closed at or near their intraday lows with all but one chart breaking support, thus turning all near-term trends negative except for one. Market breadth weakened further and is now negative on all the indexes.

Offering some optimism, investor sentiment remains near peak levels of fear that offer some encouragement.

What’s Happening on the Charts?

Source: Worden

The major equity indexes closed lower Friday with all but the Dow Jones Transports breaking near-term support levels. The depth of the declines left all but the Dow Transports in near-term downtrends with the Transports neutral.

The action also took our speculation that the Nasdaq Composite (see above) and Nasdaq 100 were possibly forming inverted head & shoulders patterns off the table as the right shoulder levels were significantly lower than those on the left.

And while the S&P 500 and DJIA now appear to be in the latter stages of the same pattern, the failures of the Nasdaq Composite and Nasdaq 100 leaves the S&P and DJIA patterns vulnerable to failure as well. 

Market breadth weakened as well with the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq negative and below their 50 DMAs.

No stochastic signals were generated.

Digging Into the Market Data

The McClellan 1-Day Overbought/Oversold oscillators are now oversold but not deeply so (All Exchange: -65.9 NYSE: -69.82 Nasdaq: -61.9).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 41%, remaining neutral.

The Open Insider Buy/Sell Ratio lifted slightly to 51.1, also staying neutral.

The detrended Rydex Ratio (contrarian indicator) slid to -0.91 and remains mildly bullish as the ETF traders are slightly more leveraged short.

We remain focused on last week’s AAII Bear/Bull Ratio (contrarian indicator), which rose to a very bullish 1.62 as crowd fear intensified.

Meanwhile the Investors Intelligence Bear/Bull Ratio (contrary indicator) was 32.1/35.8, remaining bullish. We reiterate such high levels of fear have frequently been upside catalysts over the years once the markets start to improve.

Market Valuation and Yields

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose to $236.43 per share. Thus, the S&P’s forward P/E multiple dropped 18.1x with the “rule of 20” finding ballpark fair value at 17.1x.

The S&P’s forward earnings yield is now 5.53%.

The 10-Year Treasury yield closed slightly lower at 2.91%. We view resistance as 3.0%. Support is 2.5%.

Our Near-Term Outlook

Chart improvements are now required to become more optimistic.