While the charts have yet to signal a shift in trend, the psychology data has become more cautionary as the "crowd" remains excessively bullish while insiders are now officially heading for the exits. Also, valuation continues to be of some concern.
We are keeping both eyes open for a potential shift in trend on the charts.
On the Charts
All of the major equity indices closed lower Friday with negative internals on lighter trading volume after having opened higher on the day.
The bulk of the selling pressure was in the latter part of the day, which resulted in "bearish engulfing patterns" on most of the charts. While such patterns are viewed as short-term negative, Monday's session would need to close lower to confirm said signal.
All of the indices remain in near-term uptrends with the exception of the Dow Jones Transports being "neutral."
The cumulative advance/decline lines remain positive on the NYSE, Nasdaq and All Exchange.
The overbought stochastic readings on the large-cap indices have yet to yield bearish crossover signals.
So, the charts remain essentially positive.
While the charts remain largely positive, the data remains mixed and the psychology data has intensified its cautionary tone.
All of the McClellan one-day Overbought/Oversold Oscillators are neutral (All Exchange:-7.12 NYSE:-8.06 Nasdaq:-7.95).
However, the Open Insider Buy/Sell Ratio dropping to 22.3 (see below) has officially moved into bearish territory denoting the increased intensity of insider selling.
This is in sharp contrast to the detrended Rydex Ratio (contrary indicator) at a bearish 1.32 as the ETF traders are near their highest level of leveraged long for the past 12 months. We reiterate they are notorious for being on the wrong side of the fence at market tops and bottoms as they were extremely leveraged short at the end of 2018 from which point the DJIA rallied 4,000 points.
Meanwhile, the AAII and Investors Intelligence bear/bull ratios (contrary indicators) continue to show an excess of bullish sentiment at 20.67/40.67 and 17.8/58.9, respectively.
The S&P 500 remains overvalued trading at at a forward P/E multiple of 18.6x consensus 12-month earnings estimates from Bloomberg of $175.78 per share, versus the "rule of 20" fair value multiple of 18.2x.
The S&P's forward earnings yield is 5.38%, while the 10-year Treasury is at 1.83%.
While the charts have yet to send any notable sell signals, the combination of valuation and psychology data suggest the "ice" supporting market advances is dangerously thin, although not yet broken. As such, we are maintaining our near-term "neutral" outlook for the major equity indices.