A shift in the equity index charts and data require us to follow our discipline and revise our near-term outlook. Indeed, were it not for valuation, we would be forced to be more constructive.
On the Charts
All the major equity indices closed higher Wednesday except for the Nasdaq Composite (see below) and Nasdaq 100, which posted losses.
Internals were positive on the NYSE and Nasdaq on strong volume. Chart improvements were seen on the DJIA, MidCap 400, Russell 2000 and Value Line Arithmetic Index as all posted new all-time closing highs.
Also, the S&P 500 closed back above its near-term uptrend line and is now in a positive trend while the Dow Jones Transports closed above resistance and is now neutral.
So, the Nasdaq Composite, Nasdaq 100 and Dow Transports are now in neutral trends with the rest positive.
Market breadth remains positive as well, with the cumulative advance/decline lines bullish for the All Exchange, NYSE and Nasdaq.
The one-day McClellan Overbought/Oversold Oscillators remain neutral (All Exchange: +6.68 NYSE: +5.51 Nasdaq: +7.72) despite Wednesday's surge.
The psychology data saw the Open Insider Buy/Sell Ratio dip to 33.8 but remains neutral.
Of greater note, the detrended Rydex Ratio (contrarian indicator) saw the leveraged ETF traders decrease their leveraged long exposure to a neutral 0.87, relieving some of the excessive bullish sentiment concerns.
However, this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) was little changed at a bearish 20.8/62.4 while the AAII Bear/Bull Ratio also saw little change at 23.43/43.53.
It is now the extended market valuation that is the greater concern. The S&P's forward 12-month consensus earnings estimate from Bloomberg rose to $166.10 per share, resulting in the S&P's forward multiple of 22.6x while the "rule of 20" finds fair value of 19.0x.
The S&P's forward earnings yield is 4.4% with the 10-year Treasury yield rising to 1.04%.
The volatility of the markets over the past few sessions has been creating swings in the data and charts that have caused more frequent shifts in our outlook than normal. Nonetheless, the evidence presented Wednesday suggests we move our outlook back to "neutral" from "neutral/negative."