Well that was fun! But can it last?
All the major equity indexes closed higher Tuesday near their intraday highs, and all but two indexes broke above resistance. The end of the session left all the index charts in near-term uptrends.
However, recent strength has pushed the 1-day McClellan OB/OS oscillators into overbought territory, suggesting a pause/consolidation of recent gains.
So, while Tuesday's action increased our confidence in a market recovery, we suspect some pause/consolidation is likely over the near term.
Now let's take a closer look.
On the Charts
All the major equity indexes closed higher Tuesday with strong internals as all closed near their highs of the day, holding on to notable gains.
The notable gains saw all but the Nasdaq Composite and Nasdaq 100 close above resistance while all managed to rise above their 50-day moving averages.
More positive technical events were generated as the S&P 500 (see above), DJIA, and Dow Jones Transports closed above their intermediate-term downtrend lines.
As such, all the charts are now in near-term bullish trends.
As well, cumulative market breadth turned positive for the All Exchange, NYSE and Nasda turned positive, also closing above their 50 DMAs.
Some stochastic levels are now overbought, however, but have not generated bearish crossover signals thus far.
Digging Into the Data
Regarding the data, the McClellan OB/OS Oscillators are sending a caution signal as all are now overbought (All Exchange: +65.45 NYSE: +73.55 Nasdaq: +60.87). In our opinion, they suggest some near-term consolidation is likely.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) is neutral at 44%.
The Open Insider Buy/Sell Ratio rose to 70.5, also stayed neutral.
The detrended Rydex Ratio (contrarian indicator) dropped to -1.78 and is now bullish versus its prior very bullish signal as the leveraged ETF traders remain leveraged short.
This week's AAII Bear/Bull Ratio (contrarian indicator) saw the crowd staying very fearful, at 2.11 and very bullish .
The Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a rise in bulls and dip in bears but is still very bullish at 36.6/32.4. Three times in the past decade, such readings have marked market lows, most followed by notable rallies.
The Investors Intelligence Survey is 36.6/32.4 (very bullish)
Valuation and Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped to $238.28 per share. As such, the S&P's forward P/E multiple is 16.5x and at a discount to the "rule of 20" ballpark fair value at 17.0x.
The S&P's forward earnings yield is 6.05%.
The 10-Year Treasury yield closed higher at 3.02%. We view support as 2.8% and resistance at 3.15%.
Our Near-Term Market Outlook
Tuesday's market action increased our confidence that the markets are recovering from the recent destruction that has transpired since the beginning of April. However, over the near term, we believe some consolidation is now likely given the McClellan OB/OS and narrowing of the S&P's forward P/E versus ballpark fair value.