The Nasdaq Composite and Nasdaq 100 made new closing highs for the second day in a row on Wednesday while all the equity index charts remain in near-term uptrends. Cumulative breadth even saw some improvement.
Yet while the charts remain bullish, there are a few issues that, in our opinion, have a counterbalancing effect: valuation and sentiment on the part of investment advisors.
Let's take a close look at the latest charts and data.
On the Charts
All the major equity indices closed higher Tuesday with positive internals on the NYSE and Nasdaq.
While they closed at points within their intraday ranges, the Nasdaq Composite and Nasdaq 100 posted new closing highs for the second consecutive session.
Also, the Russell 2000 closed above near-term resistance.
All the indices remain in bullish near-term uptrends and lack sell signals at this stage.
Meanwhile, cumulative breadth saw some improvement with the All Exchange, NYSE and Nasdaq cumulative advance/decline lines in uptrends.
At this point, it makes sense to honor said trends, in our view.
Still, with the data remaining generally neutral, we believe there are other issues to be considered.
Data Largely Neutral
The one-day McClellan Overbought/Oversold Oscillators are all neutral (All Exchange: +6.87 NYSE: +13.61 Nasdaq: -0.35).
The Open Insider Buy/Sell Ratio is neutral as well, at 48.3, while the detrended Rydex Ratio (contrary indicator) is neutral at 0.7.
This week's AAII Bear/Bull Ratio (contrary indicator) stayed bullish at 46.89/23.58 but one concern is the counterbalancing effect by the Investors Intelligence Bear/Bull Ratio (contrary indicator; see below) finding investment advisors staying excessively bullish at 17.5/57.3. They were excessively bearish at the March lows.
The Investors Intelligence weekly bear/bull reading 3-week average is 17.5/57.3 (bearish) as of 8/3.
The counterintuitive percentage of S&P 500 issues trading above their 50-day moving averages remains neutral at 64.2.
Our second concern is valuation, which finds the S&P 500 trading at a multiple of 22.7x forward 12-month earnings estimates from Bloomberg of $145.62 per share, while the "rule of 20" finds the fair value multiple at 19.5x. The valuation gap continues to suggest the S&P is overextended at current levels.
The S&P's forward earnings yield is 4.4% and the 10-year Treasury yield is 0.5%.
While we are loathe to fight the chart trends, we still believe that extremely bullish advisor sentiment and valuation are enough of a concern to warrant maintaining our near-term "neutral" outlook for the equity markets as the market advances remain quite selective in their composition.