Corrective phase of U.S. equities not over, according to technical indicators

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“A number of technical indicators have been very helpful in timing the end of prior corrective phases when cyclical equity conditions were still generally constructive, i.e. a sustainable, low inflation global economic expansion and the absence of significantly overvalued conditions,” BCA Research said yesterday. “Currently, these indicators suggest that the corrective action in the broad U.S. equity averages has further to go.

The research note mentions the following indicators.

  • The momentum is still falling from an overbought zone, and the 26-week rate of change of S&P 500 has still not retreated to zero or below zero which typically signals a complete unwinding of overbought conditions.
  • Our Equity Investor Sentiment Composite has not yet fallen to the levels that imply a sufficient easing in overly optimistic expectations.
  • Moreover, new highs on the NYSE minus new lows have stayed elevated, providing another indication that money flows have not abated to a level that suggests that a new wall of worry has been erected.
  • Insiders remain aggressive sellers and an easing in the sell/buy ratio to a more neutral zone would provide comfort that executives had a higher conviction that their current share price valuation was not running ahead of their expectations for business performance, as is currently the case.
  • Both our Intermediate Equity Indicator (IEI) and BCA Equity Capitulation Index (ECI) are still elevated.

The report concludes that while the cyclical backdrop remains constructive for equities, it is too soon to declare that the corrective process has run its course.

Source: BCA Research, May 26, 2011.

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