Charts of the major equity indices remain positive, while data and valuation have increased their cautionary signals.
So, while we do not suggest fighting the positive trends, chasing stocks that are extended from a technical perspective may prove regrettable. Looking for names with reasonable valuations and near high volume support levels may prove to be the better choice.
On the Charts
All the equity indices closed higher Friday with positive internals on the NYSE and Nasdaq with all closing at or near their intraday highs.
The charts saw several positive technical events registered with the DJIA closing above near-term resistance (see above) while the S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index made new closing highs. All are in near-term uptrends and above their 50-day moving averages, which, in our opinion, should be respected.
Market breadth improved as well with the cumulative advance/decline lines turning positive from neutral and above their 50 DMAs.
are on bearish stochastic crossovers but have yet to be confirmed by violations of support or trend and, as such, are not yet actionable.
The data have increased their cautionary message with all the one-day McClellan Overbought/Oversold Oscillators moving to overbought levels on the All Exchange, NYSE, and Nasdaq (All Exchange: +57.77 NYSE: +63.72 Nasdaq: +52.63). While not particularly onerous, they are nonetheless overbought.
Also, the Open Insider Buy/Sell Ratio moved a bit further into bearish territory at 22.4 as insiders increased their selling activity as the rally progressed.
In contrast, the Rydex Ratio (contrarian indicator) remains bearish at 1.1 as the leveraged ETF traders remain leveraged long. The insider/Rydex dynamic is moving in a negative direction.
Last week's Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a decline in bullish advisors but remains bearish at 20.6/53.6. New data for the II will be released Tuesday.
S&P 500 Valuation
The valuation gap extended further with the S&P 500 trading at a P/E multiple of 22.7x consensus forward 12-month earnings estimates from Bloomberg of $158.13 per share, while the "rule of 20" finds fair value at 19.1x.
The S&P's forward earnings yield is 4.41% with the 10-year Treasury yield at 0.89%.
We are not inclined to fight the current positive trends and, as such, are maintaining our near-term "neutral/positive" outlook for the equity markets. However, the data suggest better buying opportunities may likely be forthcoming.