One Key Market Index Refuses to Join the Party

This post was originally published on this site

The bulk of the major equity indices closed higher Friday with only the Dow Jones Transports posting a loss.

Internals were positive on the NYSE and negative on the Nasdaq.

The S&P 500, DJIA, Nasdaq 100, MidCap 400 and Value Line Arithmetic Index all made new closing highs.

All but the Russell 2000 (see below), which is neutral, remain in near-term bullish trends and lacking sell signals.

Market breadth, however, remains split with the All Exchange and NYSE cumulative advance/decline lines positive and above their 50-day moving averages while the Nasdaq’s is negative and below its 50 DMA.

Regarding stochastic readings, the Dow Transports gave a bearish crossover signal Friday as the rest remain overbought.

Market Data

The McClellan one-day Overbought/Oversold oscillators are still neutral (All Exchange: +6.73 NYSE: +32.13 Nasdaq: -9.28) while the sentiment indicators remain cautionary.

Sentiment data still finds the Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, in bearish territory, lifting to 1.32 as the traders remain leveraged long.

Last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator) was unchanged at a bearish 17.5/54.4 with the AAII a bearish 21.4/52.2 as bullish sentiment increased.

Of note, the Open Insider Buy/Sell Ratio is still bearish and unchanged at 15.9 as insiders remain largely on the sell side. As previously noted, this data point tends to be more effective in marking market lows versus tops, in our opinion.

Market Valuation

Valuation still appears extended with the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg lifting to $182.85 per share. This leaves the S&P’s forward multiple at 22.9x while the “rule of 20” finds fair value at 18.4x. We reiterate the valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.

The S&P’s forward earnings yield stands at 4.37%.

The 10-year Treasury yield rose to 1.57% and remains near what we see as support at 1.55%. We now view 1.63% as resistance versus our prior 1.75% level, given last week’s action.

Near-Term Outlook

Despite sentiment levels, the charts and OB/OS levels suggest we stay “neutral/positive” in our near-term macro-outlook for equities.