Most of the index charts remain in uptrends but market psychology and valuation continue to press their cautionary signals suggesting an excess of bullish sentiment while valuation remains extended.
Let's take a deep dive now into the latest charts and data for the stock market.
On the Charts
Source: Worden
All the major equity indices closed higher Tuesday with positive internals on lighter trading volume.
The only chart event of note was the Nasdaq Composite (see above) closing back above its near-term uptrend line that shifts said trend back to positive from neutral.
No other technical events of note were generated although the S&P 500, DJIA and Dow Jones Transports flashed bearish stochastic crossover signals. However, those signals are not yet actionable, in our view, unless near-term support levels are violated.
So, the Nasdaq 100 and Dow Transports remain in neutral trends with the rest bullish.
Breadth remains positive for the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq.
Data
The data finds the McClellan one-day Overbought/Oversold Oscillators remaining neutral (All Exchange: +10.51 NYSE: +0.24 Nasdaq: +20.24). However, the sentiment data continues to send its cautionary signals.
The leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator), are still heavily leveraged long at a bearish 83.9% and at peak leverage levels seen over the past two years.
Meanwhile, the Open Insider Buy/Sell Ratio, at a bearish 23.3, still finds insider transactions notably on the sell side.
We think it important that throughout 2020, these conditions presented themselves four times, three of which were followed by market corrections.
Also, this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remains on a bearish signal at only 26.2% bears, suggesting an excess of optimism exists on their part.
S&P 500 Valuation
Valuation continues to appear extended as well. The S&P 500 is trading at a P/E multiple of 22.7x the forward 12-month consensus earnings estimate from Bloomberg of $167.09, while the "rule of 20" finds fair value at 18.9x.
The S&P's forward earnings yield is 4.4% with the 10-year Treasury yield dipping to 1.09%.
Near-Term Outlook
While the major indices continue to march higher as breadth remains positive, we remain of the opinion that the psychology data and valuation suggest a potentially notable amount of risk exists should unwelcome and unexpected negative news arise. We remain "neutral/negative" in our macro market outlook as a result. Be careful.
