While charts of the major equity indices remain largely positive, three factors suggest we become a bit more vigilant regarding possible headwinds in the stock market.
On the Charts
All of the major equity indices closed higher Friday with positive internals on higher trading volumes.
No resistance levels were violated. However, the DJIA and Nasdaq Composite (see below) closed at resistance while the Nasdaq 100, S&P MidCap 400 and Russell 2000 are just a tad shy.
For us, the question is, "How effective will resistance be regarding stalling progress?"
One concern is the VIX dropping to 12.01, with 12.00 being a significant level of support over the past year. While not definitive, it does imply a higher possibility of volatility entering the markets.
The cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain positive and above their 50-day moving averages while the only index not in a near-term uptrend is the Russell, which remains neutral.
The data remains largely neutral including all of the one-day McClellan Overbought/Oversold Oscillators (All Exchange:+18.14 NYSE:+26.74 Nasdaq:+12.55). The fact that they are not overbought given the recent rally is a positive, in our opinion.
The Open Insider Buy/Sell Ratio remains neutral at 59.1 with the percentage of S&P 500 stocks trading above their 50-day moving averages at neutral, with a 78.8% reading.
Crowd sentiment readings remain neutral with a neutral 0.78 detrended Rydex Ratio and 26.0/35.0 AAII Bear/Bull Ratio. We reiterate we have found that excessive enthusiasm displayed in these two indicators tend to be prescient signals prior to market contractions. That is not the case currently.
The S&P 500 is trading at forward P/E multiple of 17.0x consensus 12-month earnings estimates of $171.73 per share, versus the "rule of twenty" fair value multiple of 17.4x.
This now suggests the S&P is just shy of fair value versus its prior undervalued signals.
As there is not sufficient evidence to alter our near-term "neutral/positive" outlook for the major equity indices at this time, valuation and the VIX combined with chart resistance levels suggest we keep our guard up right now.