Bearish Sentiment Is at Decade Highs — And That's Very Bullish

As Helene Meisler says Wednesday on Real Money, “The end of the quarter is often filled with wild moves.”

But as index support levels hold and the S&P 500 continues to trade at a slight discount to ballpark fair value, we believe selective buying on weakness is warranted for those with longer-term time horizons.

Let’s take a close look at the latest charts and market data to see why I think that’s the case.

On the Charts

Source: Worden

All the major equity indexes closed lower Tuesday with negative internals as all closed near their intraday lows.

The S&P 500 (see above), Nasdaq Composite, Nasdaq 100 and Dow Jones Transports closed below their near-term uptrend lines, shifting to neutral from bullish.

The DJIA, Russell 2000 and Value Line Arithmetic Index remain bullish with the MidCap 400 staying neutral.

No support levels were violated on the charts.

Market breadth dipped but remains bullish for the cumulative advance/decline lines for the All Exchange NYSE and Nasdaq.

Stochastic levels remain neutral across the board, lacking directional implications.

The Crowd Becomes Even More Fearful

Regarding the data, the McClellan Overbought/Oversold Oscillators shifted back to neutral from overbought (All Exchange: +20.78 NYSE: +23.63 Nasdaq: +19.49).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 13%, remaining bullish.

The Open Insider Buy/Sell Ratio slipped to 65.3, staying neutral.

However, the detrended Rydex Ratio (contrarian indicator) rose to -2.06 and is on a very bullish signal. We believe it remains a positive for the markets as the leveraged ETF traders remain highly leveraged short versus leveraged long at the beginning of the year and prior to the market’s declines.

The detrended Rydex Ratio is -2.06 (bullish)

This week’s AAII Bear/Bull Ratio (contrarian indicator) saw the crowd becoming even more fearful, lifting to 2.81 and very bullish versus last week’s 1.97.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) also saw stayed on a very bullish signal and at a decade peak of fear at 44.7/26.5 as bears increased while bulls declined. As noted previously, such extreme levels of investor fear have typically presaged notable market rallies.

S&P Valuation Declines Further

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 has slipped slightly to $236.03 per share. As such, the S&P’s forward P/E multiple is 16.2x versus the “rule of 20” ballpark fair value at 16.9x.

The S&P’s forward earnings yield is 6.18%.

The 10-Year Treasury yield closed higher at 3.21%. We view support as 3.0% and new resistance at 3.51%.

Our Near-Term Market Outlook

Tuesday’s market weakness put some weight on the charts. However, given the rally last week, a pullback would not be unusual. So far, support levels have held and need to stay in that condition. So, with extreme pessimism rampant among investors while the S&P 500’s multiple has declined significantly from the beginning of the year, we believe some selective buying on the part of longer-term investors may be suitable.

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