Given notable improvement on the charts and market breadth, we believe it is appropriate to alter our near-term outlook. Even so, market data suggest upside progress may slow.
Now, let's take a close look at those charts and the data.
On the Charts
All the major equity indices closed higher Wednesday with positive internals on the NYSE and Nasdaq as trading volumes declined from the previous session.
Chart improvements were seen on the S&P 500, DJIA, Nasdaq Composite, MidCap 400 and Value Line Arithmetic index as all closed above resistance.
Also, the S&P 500 (see below) closed above its downtrend line as did the MidCap and Value Line index.
The Nasdaq 100 closed back above its uptrend line and is now in an uptrend. It is the only index currently in that condition.
The S&P, DJIA, Nasdaq Composite, MidCap and Value Line index are back to neutral with the Dow Jones Transports and Russell 2000 still in near-term downtrends.
Market breadth also improved with the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq turning neutral form negative.
No stochastic signals were generated.
All the McClellan 1-Day Overbought/Oversold oscillators that foreshadowed the recent market strength have returned to neutral territory, suggesting further progress may come at a slower pace (All Exchange: -15.13 NYSE: -24.8 Nasdaq: -7.23).
Yet, the psychology data remains a concern. The Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, remains bearish and unchanged at 1.2 as they remain leveraged long.
This week's contrarian AAII bear/bull ratio (24.5/41.67) remained in mildly bearish territory while the Investors Intelligence Bear/Bull Ratio (contrary indicator) continued to suggest an excess of bullish expectations on the part of investment advisors at a bearish 15.3/61.2. The lack of fear generated by Monday's slide still implies too much bullish optimism remains present, in our opinion.
The Open Insider Buy/Sell Ratio remains unchanged at a neutral 30.4 and still shows a lack of appetite for insiders to buy their own stock.
Valuation and Yields
The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg has ticked up to $200.08 per shares. As such, the S&P's forward P/E multiple is 21.8x with the "rule of 20" finding fair value at approximately 18.8x.
The S&P's forward earnings yield is 4.59%.
The 10-year Treasury yield closed at 1.28% and near 1.3% resistance. We view support to be 1.13%. We are monitoring the yield for a possible violation of said resistance.
The notable improvements on the charts and market breadth are, by our analysis, sufficient to raise our near-term macro-outlook for equities to "neutral" from "neutral/negative" although further progress may occur at a slower pace.
Watch Real Money's Real Talk: Debating the Death of FAANG, Thursday, July 22, 2021 at 11:30 am E.T.
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