Investor Sentiment Still At Historically High Levels of Fear

All the major equity indexes closed higher Monday with positive internals on the and as trading volumes declined from the prior session. Despite the gains as all closed near their highs of the day, all the near-term chart trends remain negative, having yet to show signs of a positive shift in the action. The data is generally neutral except for investor sentiment surveys (contrarian indicators) that are at or near peak levels of bearish opinions seen only occasionally over the past decade. In each case, the markets rallied with some being of significance. While valuation finds the forward 12-month p/e trading at a discount to fair value, we believe some toe dipping is appropriate for mid to long term investors while the short term requires chart validations that the skies are clearing.

On the charts, all the major equity indexes closed higher Monday with positive internals but on lighter volume for the NYSE and NASDAQ.

• Although all closed near their intraday highs, no violations of resistance or trend were achieved, leaving all in near-term negative downtrends.
• Cumulative market breadth was unchanged with the A/Ds for the All Exchange, NYSE and NASDAQ staying neutral and below their 50 DMAs.
• No stochastic signals were generated.

Regarding the data, the McClellan 1-Day OB/OS oscillators remain neutral (All Exchange: +32.41 NYSE: +34.92 NASDAQ: +30.44).

• The % of issues trading above their 50 DMAs (contrarian indicator) rose to 19% but remains bullish.
• The Open Insider Buy/Sell Ratio slipped to 92.7 as insiders backed off of their recent buying activity.
• In sharp contrast, the detrended Rydex Ratio remains very bullish at -3.0 as the leveraged ETF traders are leveraged short at historically high levels. Its chart shows only five times in the past decade have the ETF traders been so heavily leveraged short, all of which were followed by rallies. As such, the Rydex/Insider dynamic is very encouraging.
• This week’s AAII Bear/Bull Ratio (contrarian indicator) remains very bullish 1.97, dropping from 2.39.
• The Investors Intelligence Bear/Bull Ratio also remains very bullish signal and at a decade peak of fear at 43.0/27.8. Only twice in the past decade has bearish sentiment been this extreme, both of which were coincident with market bottoms.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX dipped to $234.73. As such, the SPX forward multiple remains at 16.9 and at a discount to the “rule of 20” finding ballpark fair value at 17.1. Said discount has not been seen in the markets for several months.
• The SPX forward earnings yield is 5.9%.
• The closed higher at 2.87%. We view support as 2.5% and resistance at 3.2%.