We continue to suspect some consolidation/retracement of the recent substantial gains may be forthcoming.
While two of the major equity indices have managed to break above resistance as well as their 50-day moving averages, the data, including that on insider buying, is continuing to send a bit of a mixed message.
On the Charts
The only major equity index to close lower Tuesday was the Dow Jones Transports as the rest advanced with positive internals and on higher volume. Of note was the ability of the NASDAQ Composite (see above) and NASDAQ 100 to close above their near-term resistance levels as well as their 50-day moving averages. It is their first close above the 50-day moving average since the beginning of last October.
All of the short-term trends are positive as are the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ. Of some concern are the stochastic levels remaining very overbought on all of the charts. As stated previously, they can do so for extended periods. However, it is their nature to reverse to being oversold at some point.
Diving Into the Data
All of the 1-day McClellan Overbought/Oversold Oscillators are very overbought (All Exchange:+116.07 NYSE:+126.31 NASDAQ:+109.39). In our opinion, they suggest some possible downside potential.
There has also been a notable pullback in the level of insider buying interest that was so aggressive two weeks ago. It has now dropped to a neutral 47.3 Open Insider Buy/Sell Ratio (see below).
The OpenInsider Buy/Sell Ratio is 47.3 (neutral)
Counterbalancing is the detrended Rydex Ratio (contrary indicator) that still finds the leveraged ETF traders highly leveraged short at -2.39. We suspect they may use any weakness to cover their exposure.
Valuation remains quite appealing as it remains well below fair value, assuming current estimates hold. The S&P 500 is trading at a forward P/E of 15.3x consensus 12-month earnings estimates via Bloomberg of $170.63 per share, versus the "rule of 20" implied fair value multiple of 17.3x.
The "earnings yield" stands at 6.54%.
While we remain near-term positive in our outlook, stochastic and McClellan OB/OS levels suggest there is potential for a pause/retracement of the recent rally over the near term.