The mega-cap stocks continue to grab the headlines and lead the market's charge, but they could be masking some issues beneath the surface.
Deteriorating breadth on the Nasdaq suggests a narrowing of participants that is being overshadowed by its largest market-cap components.
What's more, investment advisors are all on the bullish side of the boat and valuation still appears extended.
On the Charts
The major equity indices closed mixed Thursday with negative NYSE internals and negative breadth on the Nasdaq.
The Nasdaq Composite (see below), Nasdaq 100 and Dow Jones Transports posted gains as the rest declined.
No technical events of importance were generated on the charts, leaving all in near-term uptrends.
The cumulative advance/decline lines for the All Exchange and NYSE remain positive with the Nasdaq's staying neutral.
The one fly in the ointment is the fact that the bulk of the market advances has been accomplished primarily by a select few of the mega-cap stocks. It is not a dire warning. However, such setups are less than healthy regarding overall participation.
The data is still sending a generally neutral message.
The one-day McClellan Overbought/Oversold Oscillators remain neutral (All Exchange: -18.54 NYSE: -2.6 Nasdaq: -32.15).
The Open Insider Buy/Sell Ratio is neutral as well but is seeing an uptick in insider buying to 53.8 while the detrended Rydex Ratio (contrary indicator) has dropped to a neutral 0.63.
This week's AAII Bear/Bull Ratio (contrary indicator) stayed bullish at 44.96/27.69, but is being counterbalanced by the Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) finding investment advisors staying excessively bullish at 17.3/56.7.
The counterintuitive percentage of S&P 500 issues trading above their 50-day moving averages dipped to a neutral 66.7.
Valuation continues to be a concern as the S&P 500 is trading at 22.6x consensus forward 12-month earnings estimates from Bloomberg of $143.63 per share while the "rule of 20" finds fair value at a multiple of 19.5x. This valuation gap suggests the S&P continues to be extended at current levels.
The S&P's forward earnings yield is 4.42% and the 10-year Treasury yield declined to 0.54%.
While the mega-cap stocks continue to grab the headlines and may continue to do so, we believe they are masking the issues discussed above that cause us to maintain our near-term "neutral" outlook.