Data Still Suggests Pause & Consolidation
The major equity indexes closed mixed Thursday with negative NYSE internals while the NASDAQ’s were positive as trading volumes slowed on both. The mixed session, however, left all their near-term uptrends intact with no violations of support or trend as market breath remains positive as well.
However, we are still under the impression that some further pause/consolidation of the recent rally is likely given the overbought McClellan 1-OB/OS Oscillators while investor fear, that was instrumental in generating the recent rally, has seen a notable reduction. With the S&P 500 trading at a slight premium to forward 12-month fair value added to the equation, we are of the opinion that, while the uptrends should be respected, better buy points may e available in the not too distant future.
On the charts, the major equity indexes closed mixed yesterday with negative NYSE and positive NASDAQ internals.
- Only the NASDAQ Composite, NASDAQ 100, and Dow Jones Transportation managed to post gains as the rest closed in the red.
- However, no technical events of import were generated as all support levels remained intact as do the near-term uptrend lines present on each of the charts.
- The cumulative advance/decline lines remain bullish and above their 50 DMAs for the All Exchange, NYSE and NASDAQ as well.
- There was one bearish stochastic crossover signal registered on the DJT as the rest remain overbought.
On the data, the McClellan OB/OS Oscillators are still in overbought territory and, in our view, suggesting some near-term caution (All Exchange: +81.36 NYSE: +84.86 NASDAQ: +78.58).
- The % of S&P 500 issues trading above their 50 DMAs (contrarian indicator) remains neutral and unchanged at 71%.
- The Open Insider Buy/Sell Ratio slipped to 41.4, also staying neutral.
- We believe the detrended Rydex Ratio (contrarian indicator) should be noted as it has dropped to a neutral -0.38. While not negative, it suggests the leveraged ETF traders have done a significant amount of covering of their prior extremely leveraged short exposure. As such, that propellant has now been largely spent, in our opinion.
- This week’s AAII Bear/Bull Ratio (contrarian indicator moderated finding the crowd a bit less fearful lifting to 1.53 yet remains on a very bullish signal.
- However, the Investors Intelligence Bear/Bull Ratio (contrary indicator) moderated and stayed neutral with the number of bears dropping and bulls increasing at 33.3/38.9.
- The forward 12-month consensus earnings estimate from Bloomberg for the SPX dipped to $234.33. As such, the SPX forward multiple is 17.7 and at a slight premium to the “rule of 20” ballpark fair value at 17.3.
- The SPX forward earnings yield is 5.64%.
- The 10-year Treasury yield closed lower at 2.68. We view support as 2.49% and resistance at 2.78% with the caveat that it may have formed a “head & shoulders” topping pattern regarding yield.
In conclusion, while we remain of the opinion that we are in an improving environment for equities, the data and valuation are suggesting some period of pause/consolidation of recent gains is becoming more likely. Thus, we believe better buying opportunities may present themselves over the near term.