All the indices closed higher Monday with positive internals on the New York Stock Exchange (NYSE) and Nasdaq as trading volumes declined from the prior session. The charts remain positive with several new closing highs achieved. However, the data has intensified its cautionary signals while the S&P 500 Index remains overvalued by our work. As such, we remain "neutral" in our near-term outlook for the major equity indices.
Departing from our regular format, we think it instructive to look back to one year ago when the charts and data were at the opposite end of the spectrum. Since then, the Dow Jones Industrial Average has gained more than 6,700 points, the S&P 500 has climbed 873 points, the Nasdaq Composite Index has shot up 2,753 points and the Nasdaq 100 has risen 2,797 points. At the end of 2018, everyone hated the markets. Now everyone is in love.
On December 26, 2018, the markets had been crushed in a painful correction. The data at that point in time was at the opposite end of the spectrum from today's levels.
--The detrended Rydex Ratio (contrarian indicator) found the leveraged ETF traders up to their eyeballs in leveraged short exposure at -3.78. Today, they are heavily leveraged long at +1.4 near its 2019 peak.
--The AAII Bear/Bull Ratio (contrarian indicator) found the crowd very bearish at 42/27. Today they are a neutral 25.0/37.67.
--The Investors Intelligence Bear/Bull Ratio (contrarian indicator) was 21/39 while it now finds advisors overly bullish at 16.3/57.7.
-- Insiders were buying stocks hand over fist with a +160 Open Insider Buy/Sell Ratio. Today they are just short of dipping into a bearish signal at +38.7.
--Finally, valuation found the S&P 500 undervalued via the "rule of 20" with a forward 12-month price-to-earnings (P/E) of 14.0 versus fair value at 17.3. Today, the S&P 500 is now overvalued by that same metric at an 18.8 forward P/E versus fair value of 18.1.
The data and valuation at the end of 2018 was sending extremely bullish signals that resulted in significant gains to date. However, now that those gains have been achieved, the crowd thinks the sky is the limit within what we find to be a somewhat overvalued situation.
Our experience has taught us to respect these signals as they have been repeated multiple times throughout their history. They now suggest a heightened degree of caution is warranted as potential for a shift in the markets becomes more likely.
While we are not forecasting a bear market, we are of the opinion that should the signals noted above be ignored, the experience may prove to be painful. As such, we are maintaining our near-term "neutral" outlook for the major equity indexes.
