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Indexes' Latest Rallies May Not Be Over Yet

Published 05/31/2022, 09:34 AM
Updated 07/09/2023, 06:31 AM

McClellan 1-Day OB/OS Very Overbought As Rydex Stays Very Bullish

All the major equity indexes closed higher Friday with positive internals on the NYSE and NASDAQ as all closed at or near their intraday highs. Virtually every index closed above resistance with all improving their near-term trends to neutral or bullish.

Importantly, cumulative market breadth improved as well. As such, the charts put in an impressive day backed by stronger market breadth. The data, however, is mixed.

The McClellan 1-day OB/OS Oscillators are very overbought, suggesting a pause or partial retracement of recent gains. Yet, their warning is being countered by the detrended Rydex Ratio (contrarian indicator) that finds leveraged ETF traders increasing their short exposure to historical extremes and on a very bullish signal.

Thus, the chart and breadth improvements combined with the data suggest to us investors may now be a bit more comfortable in buying market dips.

On the charts, all the major equity indexes closed higher Friday with positive internals on good trading volume. All closed at or near their intraday highs with strong gains that were sufficient to move all above their respective resistance levels.

Trend lines improved as well with the SPX and DJI turning near-term positive from neutral as the rest shifted from negative to neutral.

Importantly, the gains were supported by strong market breadth that now finds the cumulative advance/decline lines for the All exchange, NYSE and NASDAQ positive with the NYSE’s back above its 50 DMA.

Stochastic levels are overbought but no bearish crossover signals have been generated.

The McClellan 1-Day OB/OS oscillators are cautionary and very overbought (All Exchange: +135.32 NYSE: +158.86 NASDAQ: +120.14).

  • The % of SPX issues trading above their 50 DMAs (contrarian indicator) rose to 44% and is now neutral.
  • The Open Insider Buy/Sell Ratio dipped to 90.6, staying neutral.
  • However, the detrended Rydex Ratio (contrarian indicator) remains very bullish, dropping to -2.83 as the ETF traders remain leveraged short at historically high levels that have been followed by market rallies as they are forced to cover. As such, the Rydex/Insider dynamic remains encouraging.
  • Last week’s AAII Bear/Bull Ratio (contrarian indicator) remained very bullish 1.97, dropping from 2.39.
  • The Investors Intelligence Bear/Bull Ratio (contrary indicator) also remained 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 slipped to $235.56. As such, the SPX forward multiple remains at 17.7 and no longer at a discount to the “rule of 20” finding ballpark fair value at 17.3.
  • The SPX forward earnings yield is 5.67%.
  • The 10-year Treasury yield closed lower at 2.74%. We view new support as 2.67% and resistance at 2.93%.

In conclusion, Friday may well have been a game changer regarding relief from the past several days of market weakness. The charts and psychology suggest there is more to come although overbought conditions may need to be neutralized first.

SPX: 3,982/4,194 DJI: 31,975/33,358 COMPQX: 11,543/12,512 NDX: 1485/12,058

DJT: 13,790/14,515 MID: 2,419/2,550 RTY: 1,790/1,945 VALUA: 8,584/9,026

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