All of the major equity indices closed lower Friday with negative internals on lighter volume.
While all closed at or near their intraday lows, no technical events were generated on the charts, leaving all in near-term uptrends with the one exception of the Dow Jones Transports remaining neutral.
The bulk of the indices remain overbought on their respective stochastic levels although none have flashed "bearish crossover signals" at this juncture.
However, the VIX chart (see below) remains a real concern for us as it is still at levels preceding important market corrections twice over the past 12 months. In both cases, said corrections occurred rapidly, resulting in difficulty in adjusting portfolios in a timely fashion.
The VIX is a very cautionary 12.62.
The data remains somewhat neutral, although psychology data is turning more cautionary.
The one-day McClellan Overbought/Oversold Oscillators are neutral (All Exchange:+6.24 NYSE:-10.45 Nasdaq:+21.19). Last week's AAII Bear/Bull Ratio (contrary indicators) remained neutral at 25.33/38.0.
However, the Investor's Intelligence Bear/Bull Ratio (contrary indicator) remained bearish at 18.1/57.1, suggesting a continuation of excess bullish sentiment/complacency on the part of investment advisors.
In addition, the detrended Rydex Ratio (contrary indicator) is now bearish as well at +1.16 as the leveraged ETF traders have finally flipped to be heavily leveraged long. As such, the psychology scales have now tilted negative.
The percentage of S&P 500 stocks trading above their 50-day moving averages is a neutral 65.2% as is the Open Insider Buy/Sell Ratio at 42.1.
The S&P 500 continues to see a decline in forward earnings estimates to $171.51 per share via Bloomberg as the index has risen. This has resulted in the index now being slightly overvalued at an 18.3x forward P/E multiple while the "rule of twenty" finds fair value at 18.2x. The prior attractive undervaluation has been resolved.
The 10-year Treasury yield is 1.78% with the earnings yield slipping to 5.46%.
While the charts have yet to send any cautionary signals, given the fact that investor psychology has become overly bullish, the S&P 500 is slightly overvalued and the VIX is at very cautionary levels, the potential for a sudden market correction that could take the crowd by surprise has increased. We do not view the risk/reward as all that attractive, thus we are maintaining our near-term "neutral/negative" outlook.