While the near-term trends remain generally positive, the counterbalancing impact of bearish cumulative breadth divergences, valuation and investor psychology continue to have us looking over our shoulder.
On the Charts
Most of the major equity indices closed lower Thursday with negative internals on the NYSE while the Nasdaq saw negative breadth but positive up/down volume.
Trading volumes declined from the prior session. No technical events of importance were generated, leaving all in near-term uptrends with the exception of the Dow Jones Transports remaining neutral.
Stochastic levels are overbought across the board but have not flashed bearish crossover signals at this point.
What continues cause us concern is the fact that the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain on bearish divergences.
As noted recently, the Nasdaq A/D (see below) is the most dramatic of the three. The chart shows the same environment existed in August 2018 and September 2019 just prior to important market corrections.
The Nasdaq Advance/Decline Line is short-term positive and above its 50 DMA but remains on a bearish divergence cautionary signal.
This describes the condition where more and more money is chasing fewer and fewer names. History has shown said structures eventually fail, leading to significantly better buying opportunities.
On the Data
All of the McClellan one-day McClellan Overbought/Oversold Oscillators remain neutral (All Exchange:+15.33 NYSE:+12.61 Nasdaq:+19.53).
The Open Insider Buy/Sell Ratio at 31.0 remains neutral too while the detrended Rydex Ratio (contrary indicator) at 0.81 has turned mildly bearish.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) still finds advisors overly bullish at 19.1/47.6.
The S&P 500 is overvalued, trading at a P/E multiple of 19.3x consensus forward 12-month earnings estimates from Bloomberg of $175.19 per share, versus the "rule of 20" fair value multiple of 18.4x.
The S&P's forward earnings yield is 5.19%, while the 10-year Treasury yield is at 1.62%.
We do not have a timing mechanism for when suspected failure of the weakening internal market structure might occur. The near-term trends have yet to break.
Nonetheless, as the underlying foundation deteriorates, the S&P 500 appears to be overvalued and the crowd chases the "have to own" names, risk is sufficiently high to warrant maintaining our near-term "neutral/negative" outlook.