While the charts of the major equity indices remain positive and lacking sell signals, the psychology data and valuation continue to imply a fairly high level of risk currently exists for equities, as discussed below.
On the Charts
All the major equity indices closed higher Thursday and at or near their intraday highs with positive internals on higher trading volumes.
All made new all-time closing highs with the one exception of the Dow Jones Transports, which is now the only index in a near-term neutral trend as the rest are bullish.
Market breadth remains positive as well with the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq positive and above their 50-day moving averages.
All but the Dow Transports are overbought on their stochastic readings but none have generated bearish crossover signals at this point.
In our opinion, we have yet to see sell signals generated for the indices, which suggests the current positive trends should be respected until proven otherwise.
The data, continue to counterbalance the positive chart trends.
The one-day McClellan Overbought/Oversold Oscillators remain neutral on the All Exchange, NYSE and Nasdaq (All Exchange: +24.22 NYSE: +15.91 NASDAQ: +31.59).
The Investors Intelligence Bear/Bull Ratio is 16.8/64.4 (bearish) as of 12.14.20
Psychology data and valuation, on the other hand, are flashing what have historically been prescient warning signals.
The Open Insider Buy/Sell Ratio at 24.2 is now officially in bearish territory as selling transactions have dominated throughout the recent rally.
In contrast, the leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator), remain leveraged long at a bearish 1.3, while this week's Investors Intelligence Bear/Bull Ratio (contrary indicator, see above) saw little change at a bearish 16.8/64.4 as advisors remain at historically high levels of bullish sentiment. Meanwhile, the AAII Bear/Bull Ratio saw a lift in bulls at 25.68/48.14 and near peak levels seen over the past decade as well.
Historically, periods of active insider selling when the crowd has very high bullish expectations have led to important market corrections. However, they are not a short-term timing tool as those conditions can exist for extended periods.
S&P 500 Valuation
The valuation gap still appears extended with the S&P 500 trading at a P/E multiple of 23.2x consensus forward 12-month earnings estimates from Bloomberg of $160.52 per share, while the "rule of 20" finds fair value at 19.1x.
The S&P's forward earnings yield is 4.31% with the 10-year Treasury yield at 0.93%.
Our near-term macro market outlook remains "neutral" as the charts and data are at what we view as a stalemate.