Generally positive charts for the major equity indices are being counterbalanced by overly bullish sentiment and extended valuation.
So, how should investors approach this situation?
On the Charts
All the major equity indices closed lower Friday with mostly negative internals but on lighter trading volumes. Most managed to see a late-day rally bringing them close to their intraday highs at the close.
The result was no violations of current trends or support occurred, leaving the S&P 500 (see below), DJIA and Dow Jones Transports in neutral/sideways trends as the rest remain positive.
Source: Worden
The MidCap 400 did see a bearish stochastic crossover generated but is not "actionable," in our opinion, as support has yet to be violated.
Meanwhile, the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain positive and above their 50-day moving averages.
So, the charts remain generally constructive.
The data, however, still suggest some caution is warranted.
Psychology and valuation Still Counterbalancing
The one-day McClellan Overbought/Oversold Oscillators remain neutral on the All Exchange, NYSE and Nasdaq (All Exchange: +7.72 NYSE: +8.09 Nasdaq: +6.56).
However, psychology and valuation are still counterbalancing the positive charts, by our analysis.
The Open Insider Buy/Sell Ratio dropped to 25.1 as insider selling transactions accelerated. A bearish signal would occur below 25.
Meanwhile, the leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator), remain leveraged long at very bearish 1.52.
In addition, last week's Investors Intelligence Bear/Bull Ratio (contrary indicator) saw yet another decline in bearish advisors as bullish sentiment increased and remains in bearish territory at 16.7/64.7. Also, the AAII Bear/Bull Ratio at 25.53/46.92 is near peak levels seen over the past decade.
S&P 500 Valuation
The valuation gap still appears extended with the S&P 500 trading at a P/E multiple of 22.8x consensus forward 12-month earnings estimates from Bloomberg lifting to $160.38 per share while the "rule of 20" finds fair value at 19.1x.
The S&P's forward earnings yield is 4.37% with the 10-year Treasury yield at 0.89%.
Near-Term Outlook
We remain near-term "neutral" for the general equity markets as the charts and data conflict, suggesting chasing price for new purchases on extended stocks could prove hazardous while others emerging from long bases may prove fruitful.
