Is a consolidation of the recent notable market gains on the horizon?
McClellan Oscillators are now in overbought territory while the relationship between insiders and leveraged ETF traders has inverted. Still virtually every index chart saw technical improvements Thursday and nearly all are in near-term uptrends.
Let's take a closer look at the index charts and data.
On the Charts
All the equity indices closed higher Thursday with positive internals on higher trading volumes.
Every chart registered important technical events. The S&P 500 (see below), DJIA, Nasdaq Composite, Nasdaq 100, MidCap 400, Russell 2000 and Value Line Arithmetic Index all closed above resistance and now find their near-term trends bullish.
Also, the DJIA closed above its 50-day moving average as did the Dow Jones Transports. Yet while the Dow Transports closed above its near-term downtrend line, it did not violate resistance, leaving its trend neutral.
Market breadth improved and remains positive for the All Exchange, NYSE and Nasdaq cumulative advance/decline lines and above their 50 DMAs.
The MidCap 400 is now overbought on its stochastic reading but has not given a bearish crossover signal. The rest are nearing overbought conditions on their stochastic levels.
The data have shifted somewhat.
The one-day McClellan Overbought/Oversold Oscillators have moved into overbought territory (All Exchange: +55.61 NYSE: +59.9 Nasdaq: +52.09). They are not excessive but overbought, nonetheless.
The Open Insider Buy/Sell Ratio dropped notably to 48.2, suggesting insiders started to shift from being buyers to sellers during the session.
In contrast, the Rydex Ratio (contrarian indicator) rose to a bearish 0.95 as the leveraged ETF increased their leveraged long exposure.
While not conclusive, the inversion of the insider/Rydex dynamic from its recent bullish tone is, in our view, a potential dampening factor.
This week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remains little changed and bearish at 20.2/60.6.
The valuation gap is back to extended overvalued levels with the S&P 500 trading at a P/E multiple of 23.4x consensus forward 12-month earnings estimates from Bloomberg of $157.68 per share while the "rule of 20" finds fair value at 19.2x. We believe this adds to the thought that a period of consolidation may be likely.
The S&P's forward earnings yield is 4.49% with the 10-year Treasury yield at 0.78%.
In conclusion, the OB/OS, insider/Rydex and valuation levels imply we may see a pause/consolidation of recent gains while we remain near-term "neutral/positive" in our outlook.