A combination of factors is suggesting a deceleration in the recent stock market rally.
Let's look at the latest charts, data and valuation metrics for the major equity indices and explain why a pause may be at hand.
On the Charts
All of the indices closed higher Tuesday with positive internals as most closed at or near their intraday highs. Cumulative breadth improved with the NYSE cumulative Advance/Decline closing back above its 50-day moving average and remains in an uptrend.
No technical events of import were generated with all of the charts staying in near-term uptrends. However, now that the DJIA (see above) has seen a 2,000-point trough-to-peak gain of late, the stochastic levels have finally reached overbought conditions on all but the Dow Transports. While they may stay overbought for an extended period, the fact that the Nasdaq Composite (see below), Nasdaq 100 and Value Line Arithmetic Index are quite close to resistance levels suggests the combination may result in some deceleration of progress.
Data Remains Mixed
The 1-day McClellan Overbought/Oversold Oscillators are extremely overbought with the 21-day levels neutral (All Exchange:+154.71/-29.6 NYSE:+169.41/-19.99 NASDAQ:+141.13/-41.22). It is quite rare to see the 1-day readings so extended.
However, there is a strong counterbalancing force coming from the psychology data that still finds the leveraged ETF traders (contrary indicator) near a decade high of being leveraged short at a -4.7 detrended Rydex Ratio. In contrast, insiders continued to buy their stock at these levels with a bullish 129.8 Open Insider Buy/Sell Ratio.
Valuation Still Attractive
The S&P 500 is trading at a forward P/E multiple of 15.0x consensus 12-month earnings estimates via Bloomberg of $171.65 per share, versus the "rule of 20" implied fair value multiple of 17.3x.
The "earnings yield" stands at 6.67%.
The combination of overbought levels on stochastics and the 1-day McClellan OB/OS Oscillators with some charts approaching resistance indicate the potential for a pause. Still, valuation, psychology data and improved breadth suggest we maintain our near-term positive outlook for the major equity indexes.