Three of the major equity index charts made new closing highs Tuesday while the near-term trends remain largely positive. Cumulative market breadth remains positive as well.
So, what's not to like?
On the data side, the psychology levels continue to suggest an excess of bullish market expectations on the part of investors, both individual and investment advisors, as well as leveraged ETF traders. And forward 12-month consensus earnings estimates for the S&P 500 continue to rise while the "rule of 20" suggests overvaluation persists.
Let's dig deeper on the charts and data, and weigh the positives and negatives.
On the Charts
The Dow Jones Transports, MidCap 400, Russell 2000 and Value Line Arithmetic Index closed higher Tuesday as the rest posted minor losses with mixed NYSE and negative Nasdaq internals.
The Dow Transports, MidCap and Value Line index managed to register new closing highs, leaving all but the DJIA (see above), which is neutral, in near-term uptrends.
Market breadth remains positive on the All Exchange and Nasdaq while some overbought stochastic readings appeared but have yet to generate bearish crossover signals.
The McClellan 1-Day Overbought/Oversold oscillators remain neutral (All Exchange: +25.97 NYSE: +19.77 Nasdaq: +31.54).
Sentiment indicators, however, remain cautionary. The Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, is still in very bearish territory at 1.58 as of our last reading.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish and unchanged at 16.8/63.4. The AAII, however, turned more bearish at 21.83/55.47. History suggests bullish expectations have become excessive that may cause an issue for the markets going forward.
The Open Insider Buy/Sell Ratio, however, lifted back into neutral territory at 26.4 as insiders slightly increased their buying activity.
Valuation still appears extended with the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg rising to $184.20 per share. This leaves the S&P's forward 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 4.4%.
The 10-year Treasury yield closed at 1.62% and near what we see as resistance at 1.63%. We view 1.55% as support.
The chart trends with the OB/OS levels and improving market breadth suggest we maintain our near-term "neutral/positive" macro-outlook for equities, despite sentiment and valuation concerns.
Note: Our next market review will be on Monday, May 3.