The Nasdaq continues to lead and grab the headlines. However, recent market action is not all lollipops and roses.
While the Nasdaq Composite Index and Nasdaq 100 closed above their near-term resistance levels, their progress was marred, in our opinion, by a general deterioration in overall market breadth as participating stocks became more selective.
Meanwhile, valuation in terms of the S&P 500, remains extended.
On the Charts
The major equity indices closed mixed Friday with negative internals on higher trading volumes on both the NYSE and Nasdaq.
The S&P 500, DJIA, Nasdaq Composite, Nasdaq 100 (see below) and Dow Jones Transports closed higher with the Nasdaq indices violating their resistance levels.
The S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index posted declines.
Breadth is a concern as the advances came on notably negative breadth on the NYSE and Nasdaq with the cumulative advance/decline lines turning neutral from bullish on the All Exchange and negative from neutral on the Nasdaq. The NYSE A/D remains positive.
We find the breadth deterioration potentially problematic as such declines in a rising market frequently prove to be prescient cautionary signals for weakening market internals.
The data remain generally neutral.
The one-day McClellan Overbought/Oversold Oscillators are mostly neutral with the Nasdaq's mildly oversold (All Exchange: -37.74 NYSE: -19.88 Nasdaq: -54.28).
The Open Insider Buy/Sell Ratio is neutral as well, at 54.3, while the detrended Rydex Ratio (contrary indicator) is neutral at 0.63.
Last week's AAII Bear/Bull Ratio (contrary indicator) stayed bullish at 44.96/27.69 but was counterbalanced by the Investors Intelligence Bear/Bull Ratio (contrary indicator) finding investment advisors staying excessively bullish at 17.3/56.7.
The counterintuitive percentage of S&P 500 issues trading above their 50-day moving averages dropped to a neutral 63.4.
Valuation continues to be a concern as the S&P 500 is trading at 22.6x consensus forward 12-month earnings estimates from Bloomberg of $144.93 per share while the "rule of 20" finds fair value at a multiple of 19.5x. This valuation gap suggests the S&P continues to be extended at current levels.
The S&P's forward earnings yield is 4.43% and the 10-year Treasury yield has declined to 0.54%.
We are maintaining our near-term "neutral" outlook for the equity markets as deteriorating breadth, investment advisor excessively bullish sentiment and valuation counterbalance the appearance of the major index advances.