Was this it or just a one-day blip?
Despite today's early surge, the period of consolidation we have been expecting appears to have arrived on Tuesday and may continue for the short term.
On the Charts
All of the major equity indices closed lower Tuesday with negative internals on lighter trading volume. Some cracks appeared on the charts as the S&P 500 (see above), DJIA and Nasdaq 100 (see below) closed below their short-term uptrend lines. We suspect this break of trend may be the initiation of some sideways movement/consolidation of the recent rally.
Meanwhile, the Dow Transports closed below its 50-day moving average but did maintain its uptrend. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain in uptrends as well.
As speculated recently, the significant overhanging volume on the charts at their current resistance levels may require more work over the near term to be overcome. Tuesday's action may have been the first indication of that occurring.
Data Remains Mixed
On the negative side, all of the McClellan Overbought/Oversold Oscillators remain overbought but much lower than Tuesday's levels (All Exchange:+83.33/79.55 NYSE:+93.14/98.41 NASDAQ:+78.66/+64.21). Also, the OEX Put/Call Ratio finds the pros now heavy in puts at 1.81.
Counterbalancing is the fact that the detrended Rydex Ratio (contrary indicator) still finds the leveraged ETF traders very leveraged short at a bullish -1.42.
Checking in on Valuation
The market's valuation still seems quite appealing as it remains well below fair value, assuming current estimates hold. The S&P 500 is trading at a forward P/E multiple of 15.5x consensus 12-month earnings estimates from Bloomberg of $169.71 per share, versus the "rule of 20" implied fair value multiple of a 17.3x.
The "earnings yield" stands at 6.45%.
We are maintaining our near-term "positive" outlook for the major equity indices with the caveat that some further sideways consolidation of the recent rally may be required before further progress can commence.