While the large-cap equity indices continue to steal the headlines, we remain "neutral/negative in our near-term outlook.
Valuation, advisor sentiment and, possibly most important of all, one chart whose bearish divergences have presaged important market corrections. They suggest the foundation holding the indices up has weakened to the point of possible failure.
On the Charts
All the major equity indices closed higher Monday with positive internals on the NYSE and Nasdaq as volumes declined.
The S&P 500, Nasdaq Composite and Nasdaq 100 made new closing highs while the Russell 2000 closed back above its 50-day moving average. So, regarding short-term trends, all are positive with the exceptions of the Dow Jones Transports, Russell and Value Line Arithmetic Index being neutral.
However, we believe these gains and recent positive action are being overridden by a notable deterioration in market breadth.
The Nasdaq cumulative advance/decline line (see below) shows an unmistakable decline as the markets have been rising. The same holds true for the NYSE and ALL Exchange, although not to as obvious a degree.
The Nasdaq Advance/Decline Line is short-term positive and above its 50 DMA but with bearish divergence.
As the chart notes, the same deterioration of the market's foundation occurred in mid-June 2019 and August 2018. In both cases, notable corrections occurred after these signals. They describe the reality that fewer and fewer stocks are actually posting gains in portfolios.
On the Data
All of the McClellan one-day McClellan Overbought/Oversold Oscillators remain neutral (All Exchange:-12.68 NYSE:-1.86 Nasdaq:-13.11).
The Open Insider Buy/Sell Ratio at 40.6 remains neutral as does the detrended Rydex Ratio (contrary indicator) at 0.51.
The new Investors Intelligence Bear/Bull Ratio (contrary indicator) still finds advisors overly bullish at 19.1/47.6.
The S&P 500 is trading at a P/E of 19.1x consensus forward 12-month earnings estimates from Bloomberg of $175.35 per share, versus the "rule of 20" fair value multiple of 18.4x. This leaves the S&P at its most overvalued level over the past several months.
The S&P's forward earnings yield is 5.23% while the 10-year Treasury yield is at 1.55%.
The S&P 500, Nasdaq Composite and Nasdaq 100 remain in the spotlight of investors' attention. However, the notable weakening of the underlying structure combined with advisor sentiment being overly bullish as the S&P appears to be overvalued force us to maintain our near-term "neutral/negative" outlook for the indices.