While the bulk of the indices closed higher again Tuesday, trends remain a mix of neutral and positive and some caution signals are starting to appear on the data screen.
There are a number of issues at hand that warrant maintaining our current outlook for the major equity indices. Indeed, four data points suggest better buying prospects for stocks may lie ahead.
The Dow Jones Industrial Average and Dow Transports closed lower Tuesday as the rest advanced. Internals were positive on mixed volume.
The Nasdaq Composite, Nasdaq 100 and Russell 2000 (see below) all posted new closing highs. Therefore, we find the chart trends positive with the exceptions of the DJIA and Transports staying neutral. Still, we would note the stochastic readings for all but the DJIA and Transports are well into overbought territory although they have not yet produced bearish crossover signals.
Another issue presents itself in the form of the VIX that, at 12.4, is back at support seen throughout the month of May. To us, this implies the potential for volatility reentering the market, possibly in the near term. It is at least worth monitoring given its history.
The data is starting to send some caution signals as well. While the 1-day McClellan Overbought/Oversold Oscillators are still neutral, the 21-day readings are now overbought across the board (All Exchange:+43.52/+65.11 NYSE:+47.54/+72.35 NASDAQ:+43.5/+63.47).
Meanwhile, the Equity Put/Call Ratio contrary indicator at 0.48, finds the crowd overly optimistic while the pros have made a heavy bet that the markets will see near-term weakness as they are loaded in puts at 2.49 on the OEX P/C (see below).
The balance of the data remains neutral.
The forward P/E multiple for the S&P 500 based on 12-month consensus earnings estimates from Bloomberg of $163.36 per share is 16.8x versus the "rule of 20" implied fair value of 17.1x.
With the combination of OB/OS levels, Put/Call Ratios, the VIX and stochastic readings with valuation approaching fair value, we are keeping our "neutral" near-term outlook in place.