The vast majority of the index charts have violated their respective resistance levels while market breadth improves. Meanwhile, the psychology data remains extremely positive to the point that we are maintaining our near term "positive" outlook for the major equity indices.
Multiple Resistance Levels Violated
All of the indices closed higher Friday with advancers swamping declining issues by a broad margin as up/down volumes did he same.
The S&P 500, DJIA, Nasdaq Composite, S&P MidCap 400, Russell 2000 and Value Line Arithmetic Index all closed above resistance while the Nasdaq 100 and Dow Jones Transports closed at resistance. Therefore, the Nasdaq 100 and Dow Transports are the only two remaining in neutral trends as rest have turned positive.
The cumulative advance/decline lines have turned positive as well but remain below their 50-day moving averages. The stochastic levels have yet to move into overbought territory, remaining neutral.
All of the McClellan 1-day Overbought/Oversold Oscillators are well into overbought territory, with the 21-day's remaining oversold (All Exchange:+100.44/-86.46 NYSE:+109.81/-80.4 NASDAQ:+90.1/-95.77). However, despite the caution from the 1-day OB/OS, the psychology data continues to suggest further upside remains over the next days/weeks ahead.
The detrended Rydex Ratio (contrarian indicator) finds the leveraged ETF traders even more leveraged short than prior to the rally at a decade high of -5.17, while insiders via the Open Insider Buy/Sell Ratio continue to be very active buyers at 160.3.
We suspect some of Friday's surge may have been due to short-covering. If that is the case, it's likely that activity may accelerate.
Valuation still seems quite appealing as it is well below fair value, assuming current estimates hold. The S&P 500 is trading at a forward P/E of 14.7x consensus 12-month earnings estimates via Bloomberg of $172.39 per share, versus the "rule of 20" implied fair value of 17.3x.
The "earnings yield" stands at 6.81%.
Our analogy of the markets being "akin to dry wood waiting for a spark" last Friday was prescient. And while further advances may occur at a slower pace, psychology and valuation suggest there is more to come. Improvement in overall market breadth adds to that conclusion.