We believe there continues to be enough evidence gathering suggestive of some consolidation/retracement of the recent rally that may provide better buying opportunities.
Let's examine why a lot of "fuel" may have been burned off of late.
On the Charts
The major equity indices closed mixed Friday with the S&P 500 (see below), DJIA, Nasdaq Composite and Nasdaq 100 posting minor losses as the rest posted minor gains. Internals were positive on both the NYSE and Nasdaq.
All of the indices remain in short-term uptrends as do the cumulative advance decline lines with the All Exchange and NYSE A/Ds moving back above their 50-day moving averages.
All of the stochastic levels are very overbought, however. While they can remain so for extended periods, they are of some concern as bearish crossovers are likely to develop at some point.
Data Remains Mixed
The fact that the 1-day McClellan Overbought/Oversold Oscillators remain extremely overbought are of primary concern (All Exchange:+145.43/+10.65 NYSE:+160.75/+25.99 NASDAQ:+133.05/-4.74). They imply the "fuel" that has propelled the markets higher of late is largely spent. Also, the Open Insider Buy/Sell Ratio has dropped to a neutral 71.0 from its prior very bullish readings suggesting the same.
The OEX Put/Call Ratio at 4.26 finds the pros very heavy in puts, expecting weakness. Some counterbalancing comes from the detrended Rydex Ratio (contrarian indicator), which continues to show the leveraged ETF traders very leveraged short at -2.43.
Valuation Still Sits Well Below Fair Value
Assuming current estimates hold, the S&P 500 is trading at a forward P/E multiple of 15.2x consensus 12-month earnings estimates via Bloomberg of $170.69 per share, versus the "rule of 20" implied fair value multiple of 17.3x.
The "earnings yield" stands at 6.58%.
While we are keeping our near-term "positive" outlook in place, the size of the recent rally combined with stochastic and McClellan OB/OS levels suggest better buying opportunities may lie ahead over the very short term.