With the data still a mix of neutral and positive readings, we are maintaining our near-term "neutral/positive" outlook for the major equity indices.
On the Charts
The indices closed mixed on Tuesday, with the Nasdaq 100 Index and S&P Midcap 400 Index posting minor gains as the rest declined. Trading volumes declined with negative Nasdaq internals as the NYSE saw negative breadth but positive up/down volume.
There were no technical events of import, leaving the S&P 500, Dow Jones Industrials and MID in near-term uptrends with the rest neutral. The cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq dipped, but remain positive.
In our opinion, some high volume-at-price (VAP) levels may have the greater influence over the near term in some cases. Both the SPX and Value Line Arithmetic Index are at high VAP levels that may require multiple attempts to be overcome while the Nasdaq 100 Index is above its VAP, suggesting significant price support.
Data Is Mostly Neutral
The data remains mostly neutral. The 1-day McClellan Overbought/Oversold Oscillators are still neutral (All Exchange:+28.84; NYSE:+40.58; Nasdaq:+18.26). The Open Insider Buy/Sell Ratio (56.5) and the percentage of SPX stocks above their 50-day moving averages (54.7%) are neutral as well.
Psychology has actually improved further. Yesterday's AAII Bear/Bull Ratio (contrary indicator) saw an increase in bearish sentiment in the face of the rally to 39.33/23.33. We view this lack of enthusiasm on the part of the crowd as a positive. The detrended Rydex Ratio (contrary indicator) at -1.35 also shows the leveraged ETF traders heavily short as they remain nonbelievers of recent strength.
The S&P 500 is trading at a forward P/E multiple of 16.9x consensus 12-month earnings estimates from Bloomberg that sit at $171.04 per share, while the "rule of twenty" fair value multiple is 17.9x, suggesting the S&P is undervalued. This is based on the assumption that these estimates will hold. The shift in valuation has largely been due to the notable drop in the 10-year Treasury yield to 2.14%.
The earnings yield stands at 5.93%.
Given the state of the charts, data and valuation, we are sticking with our near-term "neutral/positive" outlook.