Be Careful Out There: Market Sentiment Suggests Increased Need for Caution

 | Jun 19, 2018 | 12:14 PM EDT
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For various reasons, the concerns that have kept our "neutral" near-term outlook for the major equity indices in place persist and appear to be bearing fruit Tuesday. While the overall data remains mixed, some of the sentiment data is intensifying its cautionary tone.

Other than the one new closing high, no other technical events of import were generated on the index charts Monday. Internals were positive on the NYSE and NASDAQ as volumes declined on both exchanges from the prior session.

Charting the Indices

All of the indices managed to rally well above their intraday lows, but the S&P 500, Dow Jones Industrial Average, Nasdaq 100 and Dow Jones Transports closed lower with the rest posting gains as the Russell 2000 (see below) made another new closing high.

Source: Bloomberg

All of the cumulative advance/decline lines remain positive and above their 50-day moving averages. However, stochastic levels remain overbought with the exception of those that have recently given "bearish crossover signals" while all remain very extended above their 50 DMAs and support.

This degree of extension has been a real concern as it implies, should some weakness occur, it may prove to be more violent and faster than might otherwise be the case. Such appears to be the case Tuesday.

Market Data

Only the NYSE 1-day McClellan Overbought/Oversold Oscillator is overbought with the rest neutral (All Exchange:+43.15/+1.06 NYSE:+54.41/-1.14 NASDAQ:+37.73/+5.71). The OEX Put/Call Ratio is bullish at 0.77 as is the Total P/C at 1.03 while the Equity P/C is a mildly bearish 0.54.

Other sentiment data has increased its cautionary tone as too much bullish sentiment exists. The Investors Intelligence Bear/Bull Ratio (contrary indicator) finds bulls swamping bears at 17.8/55.5 while the Rydex Ratio (contrary indicator) at 1.5 finds the leveraged ETF traders at their highest level of leveraged long in quite some time.

S&P 500 Valuation

The S&P 500 is near fair valuation based on the forward 12-month consensus earnings estimates from Bloomberg of $163.29 per share, with its 17.0x multiple comparing to the "rule of 20" implied fair value of 17.1x.

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