A Pause in the Market Rally Is Likely

 | Aug 22, 2018 | 10:00 AM EDT
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Time for stocks to take a breather?

Several new closing highs were achieved on major equity indices Tuesday as most remain in short-term uptrends. However, we now believe some pause in the recent market rally is likely.

Let's take a look at why we now expect a break in the upward action and how it effects our overall outlook for the markets going forward.

Charts

Source: Worden

All of the indices closed higher Tuesday, with positive internals on the NYSE and NASDAQ. The Dow Jones Transports (see above) and Russell 2000 managed to close above near-term resistance to new closing highs while the S&P MidCap 400 and Value Line Arithmetic Index made new closing highs as well.

Regarding short term trends, only the Nasdaq Composite (see below) and Nasdaq 100 are neutral with the rest positive.

Source: Worden

The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are positive and above their 50-day moving averages. However, we think some tempering of the recent index gains may be forthcoming, in part from the fact that the stochastic levels are now overbought, the only exceptions being the Nasdaq Composite and 100, which have lagged in this rally.

Data

The data is largely neutral. Still, another pause signal is coming from the NYSE 1 day McClellan Overbought/Oversold that is now overbought. The rest are still neutral (All Exchange:+49.36/+23.85 NYSE:+56.14/+47.26 NASDAQ:+47.12/+6.52).

The Equity Put/Call Ratio (0.58), Total P/C (0.81), OEX P/C (1.14) and Open Insider Buy/Sell Ratio (35.3) are all neutral as well.

Valuation

The S&P 500 is trading at a forward P/E multiple of 16.9x 12-month earnings estimates of $169.02 per share, versus the "rule of 20" implied fair value of a 17.2x. The "earnings yield" stands at 5.9%.

Outlook

While we remain "positive" in our near-term outlook for the major equity indices, based on the evidence presented by the charts and data, the NYSE 1 day OB/OS and stochastic readings suggest we may experience some pause in the rally over the near term.

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