With stocks sharply lower Monday morning, it is likely that prior support levels may convert to resistance. The rise in the 10-year Treasury yield is creating concern that suggests to us that sell signals on individual stock positions in portfolios should be honored.
The bulk of the index charts remain in uptrends, but market breadth and stochastic signals are suggesting some possible vulnerability while the data remains mixed with the Open Insider/Rydex dynamic still waving a yellow flag.
On the Charts
The major equity indices closed mostly higher Friday with positive internals on higher trading volumes. The exceptions were the S&P 500 and Nasdaq 100, which posted declines. There were no violations of trend or support, thus leaving all in near-term uptrends except for the Russell 2000 which is negative.
However, there are some underlying issues at hand. Market breadth has weakened. While the All-Exchange cumulative advance/decline line remains positive, the NYSE's is now neutral with the Nasdaq's negative.
The bearish stochastic crossover signals generated on the Nasdaq Composite and Nasdaq 100 earlier in the week were joined by the S&P Friday.
As yet, these are not significant concerns but do suggest some elevation in caution.
Looking at the Data
The McClellan one-day Overbought/Oversold Oscillators remain neutral (All Exchange: -18.47 NYSE: -16.21 Nasdaq: -19.68).
However, the Open Insider Buy/Sell Ratio/Rydex Ratio dynamic remains cautionary.
The Open Insider Buy/Sell Ratio at 18.5 remains in bearish territory as they remain largely on the sell side.
In contrast, the leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator) are still leveraged long at 1.32.
The insider/ETF Trader dynamic continues to suggest caution. Last week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remained on a bearish signal at 18.3/58.6.
Valuation continues to appear extended. The forward 12-month consensus earnings estimate from Bloomberg of $172.32 leaves the S&P 500's forward P/E multiple at 22.7x while the "rule of 20" finds fair value at 18.7x.
The valuation spread has been consistently wide over the past several months while the forward estimates have continued to rise consistently.
The S&P 500's forward earnings yield is 4.4%. The 10-year Treasury yield has risen notably of late, closing at 1.35% on Friday and troubling the markets. In our opinion, the chart suggests potential for a move up to 1.5%.
While we are formally "neutral" in our near-term outlook, there are some more clouds appearing that suggest a bit more caution may be appropriate.