The debate between positive chart trends versus valuation, narrowing participation within index gains and psychology data continues.
Here's our latest look at the equity index charts and data as well as where the market could be headed next.
On the Charts
The major equity indices closed mixed Thursday with generally negative internals as trading volumes declined from the previous session.
The S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index closed lower on the day while the S&P 500 (see below) closed above resistance as the Nasdaq Composite and Nasdaq 100 made more new closing highs. The DJIA and Dow Jones Transports posted gains as well.
Yet while the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain positive, Thursday's gains on negative breadth resurrects our concerns regarding a narrowing of individual sticks participating in index gains. More money chasing fewer stocks has been known to be a precursor to short-term market tops.
Nonetheless, at this point, we have yet to see actual sell signals generated on the charts, which suggests current trends should be respected.
The data remains generally neutral.
The one-day McClellan Overbought/Oversold Oscillators are all neutral (All Exchange: +18.04 NYSE: +23.15 Nasdaq: +13.71).
The Open Insider Buy/Sell Ratio is neutral as well at 42.2 while the detrended Rydex Ratio (contrary indicator) has turned bearish at 1.0.
This week's AAII Bear/Bull Ratio (contrary indicator) stayed bullish at 46.89/23.58 but one concern is the counterbalancing effect by the Investors Intelligence Bear/Bull Ratio (contrary indicator) finding investment advisors staying excessively bullish at 17.5/57.3.
The counterintuitive percentage of S&P 500 issues trading above their 50-day moving averages dipped to a neutral at 66.1 due to negative breadth in Thursday's action.
Valuation remains troubling as it has become more extended. The S&P 500 is trading at a P/E of 23.0x consensus forward 12-month earnings estimates from Bloomberg of $145.64 per share, versus the "rule of 20" fair value multiple at 19.5x. The valuation gap continues to suggest the S&P is overextended at current levels.
The S&P's forward earnings yield is 4.3% while the 10-year Treasury yield is 0.54%.
The tug of war between the index charts on one side and valuation, psychology and apparent narrowing breadth continues. We find this debate to be rather evenly balanced at this point, thus suggesting we maintain our near-term "neutral" outlook.