The bulk of the indexes closed higher on Thursday with the exception of the Russell 2000 (RTY) posting a minor loss. All rallied significantly off of their intraday lows, which we interpret as a bullish signal. Internals were positive on the New York Stock Exchange and Nasdaq as volumes declined from the prior session, while two of the indexes closed above their near-term downtrend lines with all generating bullish stochastic crossover signals.
The data remain generally positive as well. We have been of the opinion that selling into the weakness was likely to prove a mistake. We now speculate that given the state of the charts and data that the current rally has further to go before battling with important resistance levels.
On the charts, the only index closing lower on Thursday was the RTY, as all others posted gains with significant intraday rallies well above the day's lows. Internals were positive. Two of the indexes managed to close above their short- term downtrend lines, as seen on the Dow Jones Industrial Average (DJIA) and the S&P Midcap 400 Index (MID).
Importantly, all the indexes generated bullish stochastic crossover signals, implying the potential for a reversal of the prior downside pressure. However, resistance levels have yet to be violated. Market breadth has seen a minor uptick but remains in downtrends on the All Exchange, NYSE and Nasdaq.
Even with the sizable gains of the past two sessions, the data continues to send encouraging signals. All of the McClellan OB/OS Oscillators remain oversold (All Exchange:-52.25/-113.33 NYSE:-77.17/-101.27 Nasdaq:-53.45/-121.89) although less so than two days ago. The most recent readings regarding psychology remain very bullish as well as the detrended Rydex Ratio finds the leveraged ETF traders at one of their highest levels of leveraged short exposure in the past decade. Their need to cover could have a dramatic impact should the markets continue to improve.
Meanwhile, insiders have been buying at one of their most aggressive levels in a decade with a 179.6 Open Insider Buy/Sell Ratio. Valuation still seems to be quite appealing as it is well below fair value, assuming current estimates hold, with the forward 12-month earnings estimates for the S&P 500 (SPX) via Bloomberg at $168.57; that leaves the forward 12-month price-earnings (P/E) for the SPX at 14.8 versus the "rule of 20" implied fair value of a 17.3 multiple. The earnings yield stands at 6.77%.
In conclusion, while breadth needs further improvement and some downtrends remain intact, we are of the opinion that there is enough evidence to suggest the recent rally still has some fuel in the tank to push the indices higher over the near term.