The major equity indices closed mostly higher Wednesday except for the Nasdaq Composite and Nasdaq 100 posting losses. Several posted new closing highs while market breadth improved.
What may be of greater importance, however, is the yield on the 10-year Treasury closed below its near-term uptrend line as did the U.S. dollar, both of which were putting pressure on the large-cap tech sector. These improvements suggest we shift our near-term outlook.
On the Charts
Source: Worden
The major equity indices closed mostly higher Wednesday with positive internals on the NYSE and Nasdaq.
While the Nasdaq Composite and Nasdaq 100 posted declines, the DJIA, Dow Jones Transports, MidCap 400 and Value Line Arithmetic Index posted new closing highs.
Also, the Russell 2000 closed above its near-term downtrend line and is now neutral as is the S&P 500.
The Nasdaq Composite and 100 remain in negative trends as of the close with all others bullish.
Market breadth saw some improvement with the All Exchange and Nasdaq cumulative advance/decline lines turned neutral from negative with the NYSE's staying bullish.
As noted above, the yield on the 10-year Treasury and the U.S. dollar closed below their recent uptrend lines that had previously been putting pressure on the technology sector. They may now suggest some relief from that recent pressure.
We would also note the Nasdaq indices flashed bullish stochastic crossovers earlier this week.
Market Data
The McClellan one-day Overbought/Oversold Oscillators remain neutral despite recent strength (All Exchange: +4.55 NYSE: +29.84 Nasdaq: -14.69).
The detrended Rydex Ratio (contrarian indicator), which measures leveraged ETF traders, remains neutral at 0.84.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) was little changed at a bearish 18.6/53.9, suggesting too much optimism still exists on the part of investment advisors.
The Open Insider Buy/Sell Ratio remains bearish 20.4 and continues to be a concern. As such, the psychology basket remains mostly cautionary.
Market Valuation
Valuation still appears extended with the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg of $174.09 per share, leaving the S&P's forward P/E multiple at 22.4x while the "rule of 20" finds fair value at 18.5x. We reiterate 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 dipped to 4.46%.
The 10-year Treasury yield is 1.52%. Its chart suggests a pause of the recent rise in yield, in our opinion.
Near-Term Outlook
With improved breadth, neutral OB/OS levels and the shift in trend for the 10-year Treasury and U.S. dollar we are shifting to "neutral" from "neutral/negative" in our near-term outlook for the equity markets.
