Market's Advance Likely to Be Short-Lived

 | Aug 31, 2017 | 11:00 AM EDT
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Don't get too excited about the recent climb in stocks.

An improvement in the charts and general lack of data warning signals suggest some further lift is possible over the near term. However, valuation staying near historic highs, extensive margin debt levels, up 15.9% year over year, and advisor complacency remain disconcerting. The selectivity of the advance is bothersome as well.

All of indices closed higher Wednesday with positive internals on the NYSE and Nasdaq -- volumes dipped on the NYSE and rose on the Nasdaq. The S&P 500, Nasdaq Composite (COMPQX), S&P Midcap 400, Russell 2000 and Value Line Arithmetic Index closed above their short-term downtrend lines, turning said trends to neutral from negative.

Meanwhile, the S&P 500 (see above) closed back above its 50-day moving average while the COMPQX (see below) closed above near-term resistance. The cumulative advance/decline lines for the All Exchange and COMPQX turned positive and above their 50-day moving averages.

So there were several improvements. Nevertheless, we would note that while the S&P 500 is only 1% below its all-time high, less than half of its components (46.5%) are above their 50 -day moving averages. We believe this describes the notable selectivity of the market's push. Not all boats are rising with the tide.

The bulk of the data remains neutral, including all of the McClellan OB/OS Oscillators (All Exchange:+27.84/-24.67 NYSE:+17.38/-19.8 NASDAQ:+38.35/-28.73). The Total, Equity and OEX Put/Call Ratios remain neutral as well at 0.83, 0.57 and 1.06, respectively, as is the Open Insider Buy/Sell Ratio at 59.0.

The most recent AAII Bear/Bull Ratio is a neutral 34.0/31.67, while the Investors Intelligence Bear/Bull Ratio (contrary indicator) has moderated a bit, but remains bearish at 18.3/48.1.

Forward 12-month earnings estimates for the S&P 500 from Bloomberg of $137.23 per share, leave a 5.56% forward earnings yield on a 17.9x forward multiple, near a decade high.

All in all, the near-term outlook now looks a bit less onerous, but valuation, margin levels and complacency continue to be worrisome, implying overall risk outweighs potential reward.

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