While investor psychology continues to suggest an excess of bullish sentiment and overvaluation persists, we believe the charts of the major equity indices and Overbought/Oversold levels remain the dominant factors for near-term market action.
On the Charts
All the major equity indices closed higher Friday with positive internals on the NYSE and Nasdaq.
Positive technical events came in the form of the Dow Jones Transports, MidCap 400 and Value Line Arithmetic Index making new all-time closing highs.
Also, the S&P 500 (see below) and DJIA managed to reclaim their near-term uptrend lines and are back in near-term bullish trends as are the rest of the indices except for the Russell 2000, which is neutral.
Friday's positive breadth was sufficient to shift the cumulative advance/decline lines for the All Exchange and NYSE to positive from neutral while the Nasdaq's turned neutral from negative.
No stochastic signals of import were generated.
The McClellan 1-Day Overbought/Oversold oscillators remain neutral despite Friday's gains (All Exchange: +19.02 NYSE: +18.32 Nasdaq: +20.7).
Sentiment indicators remain cautionary. The Rydex Ratio (contrarian indicator) measuring the action of the leveraged ETF traders, is still in very bearish territory, dipping slightly to 1.52 as they remain heavily leveraged long.
Last week's Investors Intelligence Bear/Bull Ratio (contrary indicator) turned more bearish at 16.8/63.4 with the AAII a bearish 22.73/53.17.
In general, bullish expectations have become excessive, in our opinion, with the sentiment data in need of some rebuilding of the proverbial "wall of worry". New sentiment data will be released Tuesday.
The Open Insider Buy/Sell Ratio is mildly bearish at 24.3.
Valuation still appears extended with the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg rising to $183.75 per share. This leaves the S&P's forward P/E multiple at 22.7x, while the "rule of 20" finds fair value at 18.4x. The valuation spread has been consistently wide over the past several months while the forward estimates have risen rather consistently.
The S&P's forward earnings yield stands at 4.44%.
The 10-year Treasury yield closed at 1.57% and remains near what we see as support at 1.55%. We view 1.63% as resistance.
The chart trends with the OB/OS levels and improving market breadth suggest we maintain our near-term "neutral/positive" macro-outlook for equities intact, despite sentiment and valuation concerns.