With the major equity indices posting new all-time closing highs and the FAANG stocks making notable gains, all the index charts are back in near-term uptrends.
And while psychology and valuation continue to flash their warning signals, the McClellan Oscillators remain neutral. With this current setup, our discipline requires us to move our near-term outlook.
Here's what the charts and data are telling us:
On the Charts
All the major equity indices closed higher Wednesday with positive internals as virtually every major equity index managed to post new all-time closing high. As such, all are now in near-term uptrends while cumulative breadth remains positive on the All-Exchange, NYSE and Nasdaq.
Sell signals have yet to be presented.
As the adage says, "The trend is your friend." So, we are of the opinion the trends should be respected until proven otherwise.
The data finds the McClellan one-day Overbought/Oversold Oscillators remaining neutral (All Exchange: +15.8 NYSE: +13.25 Nasdaq: +18.01).
It may be worthy of note that the OB/OS has yet to enter cautionary overbought levels within the recent rally. In retrospect, that may be an indicator we should have paid more attention to within our analysis. We may need to see those conditions presented before a retracement would begin.
Yet the sentiment data continues to send its cautionary signals. The leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator) are still heavily leveraged long at a bearish 1.39 and near peak leverage levels seen over the past two years.
Meanwhile the Open Insider Buy/Sell Ratio at a bearish 23.9 still finds insider transactions notably on the sell side.
As I've mentioned, these conditions presented themselves four times during 2020, three of which were followed by market corrections.
Meanwhile, this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) remains on a bearish signal at 16.7/63.7, suggesting an excess of optimism exists on their part.
Valuation continues to appear extended. The S&P 500's forward 12-month consensus earnings estimate from Bloomberg at $167.58 per share leaves the S&P's forward P/E multiple at 23.0x, while the "rule of 20" finds fair value at 18.9x.
The S&P's forward earnings yield is 4.35% with the 10-year Treasury yield dipping to 1.09%.
We are shifting our near-term outlook for the equity markets back to "neutral" from "neutral/negative" as the charts have yet to generate sell signals and forward EPS consensus earnings estimates continue to rise while psychology and valuation still warn of potential risk.