Who Will Win This Heated Stock Market Debate?

 | Jun 07, 2018 | 10:17 AM EDT
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The "debate" between the charts and data appears evenly matched. The charts saw multiple improvements Wednesday, including some new closing highs. However, the data dashboard continues to flash warning signs.

So, with seemingly conflicting messages from the charts and data, which one wins out?

Improved Charts

All of the indices posted gains Wednesday with positive internals. The Nasdaq Composite (see below), Nasdaq 100 and Russell 2000 all made new closing highs as they continue to outpace the rest of the indices.

The S&P 500, Dow Jones Industrial Average, S&P MidCap 400 and Value Line Arithmetic Index all closed above near-term resistance with the S&P (see below) and DJIA turning their trends from neutral to positive. So the Dow Jones Transportation Index is now the only index in a neutral trend.

Meanwhile, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive and above their 50-day moving averages. However, while no bearish crossover signals have appeared, all of the indices except the DJIA and Transports are highly overbought on their respective stochastic readings. Also, the VIX is at its lowest level since January at 11.64, suggesting a potential rise in volatility.

Data Warnings

The data now finds only the NASDAQ 1-day McClellan Overbought/Oversold Oscillator in neutral with the rest overbought (All Exchange:+50.51/+64.59 NYSE:+57.83/+73.02 NASDAQ:+19.98/+62.39).

The Equity Put/Call Ratio finds the crowd too bullish at a bearish 0.53 with the Total P/C (0.83) and OEX P/C (1.34) neutral. And while the OpenInsider Buy/Sell Ratio is still neutral, insider buying has intensified as it has dropped from 45.4 a week ago to 28.8 as of last night.

Valuation

We also now find valuation fairly valued as the forward P/E multiple for the S&P 500 based on 12-month consensus earnings estimates from Bloomberg of $163.34 per share is 17.0x, even with the "rule of 20" implied fair value of 17.0x.

Our Outlook

While we typically defer to the charts for forecasts, we believe there is enough counterbalancing evidence discussed above, that implies some likelihood of retracement, to keep our near-term "neutral" outlook intact.

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