McClellan 1-Day OB/OS Oscillators Suggest Pause of Recent Strength
All the major equity indexes closed higher Tuesday with positive internals on the NYSE and NASDAQ as NYSE volumes dipped and NASDAQ volumes rose from the prior session. All closed near their intraday highs, holding on to notable gains. All but two indexes broke above resistance while several closed above their 50 DMAs and intermediate term downtrend lines. The end of the session left all the index charts in near-term uptrends as market cumulative breadth turned positive as well. However, recent strength has pushed the 1-day McClellan OB/OS oscillators into overbought territory, suggesting a pause/consolidation of recent gains. In our opinion, yesterday’s action increased our confidence in a market recovery. However, we suspect some pause/consolidation likely over the near term.
On the charts, all the major equity indexes closed higher yesterday with strong internals as all closed near their highs of the day.
- The notable gains saw all but the NASDAQ Composite and NASDAQ 100 close above resistance while all managed to rise above their 50 DMAs.
- More positive technical events were generated as the S&P 500, Dow Jones Industrial Average, and Dow Jones Transportation closed above their intermediate term downtrend lines.
- As such, all the charts are now in near-term bullish trends.
- As well, cumulative market breadth turned positive for the All Exchange, NYSE and NASDAQ turned positive, also closing above their 50 DMAs.
- Some stochastic levels are now overbought, however, but have not generated bearish crossover signals thus far.
Regarding the data, he McClellan OB/OS Oscillators are sending a caution signal as all are now overbought (All Exchange: +65.45 NYSE: +73.55 NASDAQ: +60.87). In our opinion, they suggest some near-term consolidation likely.
- The % of SPX issues trading above their 50 DMAs (contrarian indicator) is neutral at 44%.
- The Open Insider Buy/Sell Ratio rose to 70.5, also stayed neutral.
- The detrended Rydex Ratio dropped to -1.78 and is now bullish versus its prior very bullish signal as the leveraged ETF traders remain leveraged short.
- This week’s AAII Bear/Bull Ratio saw the crowd staying very fearful, at 2.11 and very bullish.
- The Investors Intelligence Bear/Bull Ratio saw a rise in bulls and dip in bears but is still very bullish at 36.6/32.4. Three times in the past decade, such readings have marked market lows, most followed by notable rallies.
- The forward 12-month consensus earnings estimate from Bloomberg for the SPX dipped to $238.28. As such, the SPX forward multiple is 16.5 and at a discount to the “rule of 20” ballpark fair value at 17.0.
- The SPX forward earnings yield is 6.05%.
- The 10-year Treasury yield closed higher at 3.02. We view support as 2.8% and resistance at 3.15%.
In conclusion, yesterday’s market action increased our confidence that the markets are recovering from the recent destruction that has transpired since the beginning of April. However, over the near term, we believe some consolidation is now likely given the McClellan OB/OS and narrowing of the SPX forward P/E versus ballpark fair value.