The rally continues. But the "fight" may be just beginning.
Two of the most broadly followed equity indices are now approaching levels of potentially significant high-volume resistance. This the first real technical challenge for those indices during the rally off of the December lows.
Meanwhile, the data is mixed. For the past few sessions, while maintaining our near-term positive outlook for the major equity indices, we have suggested the potential for some consolidation/retracement of the recent gains.
We are now at a point where that debate will be settled one way or the other.
On the Charts
All of the major equity indices closed higher Thursday with positive internals on the NYSE and NASDAQ as volumes declined from the previous session. Positive events occurred with the Value Line Arithmetic Index closing above near-term resistance while the S&P MidCap Index broke above its 50-day moving average.
The Dow Jones Transports is now the only index below its 50 DMA, with all of the short-term uptrends intact on the charts and cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ.
However, in our opinion, an important technical hurdle lies just overhead.
The DJIA (see above), S&P 500 (see below) and Value Line Index are now just shy of significant overhanging trading volumes for the first time within this rally. This is where the real fight begins. Given the overbought stochastic levels and size of overhead volume, it may prove to be a more difficult barrier to overcome.
Data Is Mixed
All of the McClellan 1-day Overbought/Oversold Oscillators remain very overbought (All Exchange:+128.06/+64.64 NYSE:+141.28/84.0 NASDAQ:+120.92/+48.06). The options data is cautionary as well, with the OEX Put/Call Ratio showing the pros betting on some weakness at a bearish 1.69 while the crowd is long calls with a 0.52 Equity Put/Call Ratio (contrary indicator).
Counterbalancing these indicators is a bullish detrended Rydex Ratio (contrary indicator), which finds the leveraged ETF Traders still very leveraged short a -1.75.
Valuation still seems to be quite appealing as it remains well below fair value, assuming current estimates hold. The S&P 500 is trading at a forward P/E multiple of 15.5x consensus 12-month earnings estimates from Bloomberg of $170.35 per share, versus the "rule of 20" implied fair value multiple of 17.3x.
The "earnings yield" stands at 6.52%.
While we remain near-term positive in our outlook, we are now approaching important levels of resistance for the first time during the rally that may prove to be more difficult to overcome.