Stocks continue their upward path Tuesday after after a three-day weekend, a debt-ceiling deal and positive trading on Friday.
Indeed, three of the charts of the major equity indexes closed above resistance levels Friday. Near-term trends are still a mix of bullish, bearish and neutral projections. And while cumulative market breadth remained neutral, so did the bulk of the data, including the McClellan 1-day OB/OS Oscillators.
We believe the tug of war between the still high level of investor fear (contrarian indicator) and the wide gap in valuation for the S&P 500 versus fair value continues to suggest buying should still be done on a very selective basis.
3 Indexes Break Above Resistance
On the charts, all the major equity indexes closed higher on Friday with positive NYSE and Nasdaq internals, as all but the Dow Jones Transports closed near their session highs.
The session was strong enough to push the S&P 500 (see above), Nasdaq Composite and Nasdaq 100 above their resistance levels with the S&P and Russell 2000 shifting their trends to bullish from neutral, joining the Nasdaq indexes in that position.
The DJIA and Dow Transports remain near-term bearish with the rest neutral.
Cumulative market breadth stayed neutral for the All Exchange, NYSE and Nasdaq.
The DJIA registered a bullish stochastic crossover signal.
Data Stays Neutral
The data dashboard remains largely neutral, despite Friday's surge.
The 1-day McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: -9.19 NYSE: -22.57 Nasdaq: +1.1) and imply the potential for further upside.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, rising to 35%.
The Open Insider Buy/Sell Ratio rose to 68.2. It also remains neutral.
The detrended Rydex Ratio (contrarian indicator) rose to +0.27, also staying neutral.
Of note, this week's AAII Bear/Bull Ratio (contrarian indicator) stayed at 1.65 and remains very bullish. In our view, it remains the one bright spot on the data dashboard.
The AAII Bear/Bull Ratio (using 3WMA) is 1.65 (very bullish)
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 24.7/45.26%.
Valuation Spread Remains Wide
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw an uptick to $222.97 per share. As such, the valuation gap remains wide and is still disconcerting with the S&P's forward P/E multiple at 18.9x versus the "rule of 20" ballpark fair value of 16.2x, suggesting valuation is extended.
The S&P's forward earnings yield is 5.3%.
The 10-Year Treasury yield closed higher at 3.81%. It is in a short-term bullish trend. We see support at 3.56% and resistance at 3.81%.
While the charts and data suggest further upside over the near-term, the struggle between the opposing forces of high investor fear levels juxtaposed with extended valuation suggest any buying of equities should continue to be done on a very selective basis.