All but one of the major equity indices are in near-term uptrends as cumulative breadth remains positive. However, we are seeing some internal divergence on the S&P 500 as the number of its components trading above their 50-day moving averages is declining as the index continues to rise.
In addition, psychology data and valuation continue to suggest caution is warranted.
On the Charts
The major equity indices closed mixed Friday with positive internals.
The Nasdaq Composite, MidCap 400, Russell 2000 and Value Line Arithmetic Index posted gains, with the Nasdaq registering another new closing high. The rest declined but no support levels or trends were violated. As such, all are in near-term uptrends except the Dow Jones Transports, which is neutral.
And while cumulative breadth remains positive for the All Exchange, NYSE and Nasdaq, the internals on the S&P 500 are raising some concern. As the chart below describes, as the S&P remains in an uptrend, the percentage of its components trading above their 50-day moving averages is actually in decline, implying the potential for a weakening internal structure that should be monitored.
% of SPX Stocks Above Their 50 DMAs 68.7% (neutral)
The McClellan one-day Overbought/Oversold Oscillators are still in neutral territory (All Exchange: -1.43 NYSE: -12.74 NASDAQ: +7.86).
However, the sentiment data is still sending its cautionary signals.
The leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator), have extended their already heavily leveraged long exposure to a very bearish 1.5.
Meanwhile, the Open Insider Buy/Sell Ratio finds the insiders' selling activity at its highest point since just prior to the sell off last March at a bearish 21.2. We reiterate, such insider activity should not be ignored, especially when the "crowd" is at very high levels of bullish sentiment as is currently the case. These conditions were presented four times during 2020, three of which were followed by market corrections.
Last week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remained on a bearish signal at 16.7/63.7, suggesting an excess of optimism exists on their part.
S&P 500 Valuation
Valuation also continues to appear extended. With the forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg rising to $168.00 per share, the S&P's forward P/E multiple is 22.9x, while the "rule of 20" finds fair value at 18.9x.
The S&P's forward earnings yield is 4.37% with the 10-year Treasury yield dipping to 1.09%.
While the charts have yet to weaken, psychology data, and in particular insider activity, remain quite cautionary as does valuation. With the S&P's divergence now added to the mix, we remain "neutral" in our near-term outlook for equities in general.