The charts of the major equity indices remain positive with trends that should be respected until proven otherwise. However, psychology and valuation suggest investors keep tight reins on their enthusiasm.
Here's our take on the latest charts and market data.
On the Charts
All the equity indices closed lower Tuesday with negative internals on the NYSE and Nasdaq. However, the weakness did not result in any important technical signals being generated as all uptrends and support levels remained intact.
All the charts remain in near-term uptrends, above support and above their 50-day moving averages.
The stochastic levels remain overbought but have as yet to register bearish crossover signals. Breadth remains positive with the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq in uptrends and above their 50 DMAs.
Data Send Mixed Signals
The one-day McClellan Overbought/Oversold Oscillators saw declines in their overbought conditions to a larger degree than what Tuesday's minor weakness would typically generate with the NYSE 1-day level dropping back to neutral (All Exchange: +56.41 NYSE: +45.25 Nasdaq: +67.45). We view that action as somewhat positive.
However, the gap between the Open Insider Buy/Sell Ratio and Rydex Ratio (both contrarian indicators) has widened and is becoming more of a concern. Insiders continued to increase their selling activity to 28.3, just shy of bearish levels, while the Rydex Ratio (see below) saw the leveraged ETF traders intensify their leveraged long exposure to a bearish 1.29. Historically, insiders have been the on the right side of the trade within this dynamic.
The detrended Rydex Ratio is +1.29 (bearish)
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) was little changed at a bearish 23.2/+54.6 while the AAII Bear/Bull Ratio (contrary indicator) is a bullish 42.68/28.62.
The counterintuitive percentage of S&P 500 issues trading above their 50-day moving averages is neutral at 69.5%.
The valuation gap remains extended with the S&P 500 trading at a P/E multiple of 22.6x consensus forward 12-month earnings estimates from Bloomberg of $155.74 per share, while the "rule of 20" finds fair value at 19.3x. We reiterate, however, that this valuation extension has been present for the past several months.
The S&P's forward earnings yield is 4.43% with the 10-year Treasury yield at 0.73%.
We are keeping our near-term "neutral/positive" outlook in place for the equity markets.