While the bulk of the index chart patterns remain bullish, the data are now suggesting some pause or partial retracement of the recent gains is likely in the cards.
On the Charts
All the major equity indices closed higher Monday with positive internals.
New all-time closing highs were registered on every index except the Dow Jones Transports (see below), which tested resistance but failed to violate. It remains in its neutral near-term trend while all of the other indices remain near-term bullish.
Cumulative breadth for the All Exchange NYSE and Nasdaq remains positive as well.
However, the stochastic levels are now in the 90s, suggesting overbought conditions are now present. They have yet, however, to generate bearish crossover signals.
The data is now waving some yellow flags that suggest, in our opinion, that some pause of the recent market strength or partial retracement of gains has become more likely.
The McClellan one-day Overbought/Oversold Oscillators have moved into overbought territory that now suggest some caution is warranted (All Exchange: +75.49 NYSE: +71.76 Nasdaq: +78.1).
The leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator) moved deeper into bearish territory at 1.32 from the prior 1.11 reading. They are now quite leveraged long.
In contrast, the Open Insider Buy/Sell Ratio saw insiders pick up the pace of their selling to 25.9 and just shy of bearish levels below 25.0. The Rydex/Insider dynamic is back on a warning signal.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remains on a bearish signal at 16.9/57.8 as bullish sentiment dipped slightly.
Valuation Continues to Look Extended
The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg rose again, this time to $172.22 per share, leaving the S&P's forward multiple at 22.7x, while the "rule of 20" finds fair value at 18.8x. As we have noted, the valuation spread has been consistently wide over the past several months while the forward estimates have continued to rise consistently.
The S&P's forward earnings yield is 4.4% with the 10-year Treasury yield at 1.16%.
While the charts remain bullish, the data is now presenting several signals suggesting a near-term pause or partial retracement of some of the recent gains in the markets has become more likely.