All the major equity indexes closed higher on Wednesday with positive NYSE and Nasdaq internals as trading volumes rose on both from the previous session. All closed near their highs of the day, which resulted in several technical improvements on the charts, as discussed below.
Cumulative market breadth saw minor improvement with the data completely neutral except for psychology that remains on a very bullish signal, given the recent high fear levels.
However, in our opinion, psychology is somewhat counterbalance as the valuation spread for the S&P 500 widened and is overvalued versus ballpark fair value on a 12-month forward basis.
So, while Wednesday's action offers some optimism for the near term, valuation suggests buying should remain very selective.
Rally Sees Multiple Chart Improvements
Chart Source: Worden
On the charts, all the major equity indexes closed higher Wednesday with positive internals on higher volume.
All closed near their session highs that propelled the S&P 500 (see above), Nasdaq Composite, Nasdaq 100 and Russell 2000 above resistance.
Also, the MidCap 400, Russell 2000 and Value Line Arithmetic Index closed above their downtrend lines and are now neutral versus bearish while the DJIA and Russell closed above their 50-day moving averages.
As such, the S&P, Nasdaq Composite and Nasdaq 100 are near-term bullish, the DJIA, MidCap 400, Russell 2000 and Value Line index are neutral, and the Dow Jones Transports are still negative.
Cumulative market breadth saw some modest improvement with the NYSE A/D turning neutral as the All Exchange and Nasdaq remain negative that still suggest selectivity as appropriate.
The stochastic levels for the Nasdaq Composite and Nasdaq 100 remain overbought but have not triggered bearish crossover signals thus far as the rest are neutral.
Data Dashboard Remains Largely Neutral
The 1-day McClellan Overbought/Oversold Oscillators are all neutral and non-threatening (All Exchange: 10.6 NYSE: -5.38 Nasdaq: +22.33).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral lifting to 46%.
The Open Insider Buy/Sell Ratio fell slightly to 81.3. It remains neutral as prior insider buying has slackened over the past few weeks.
The detrended Rydex Ratio (contrarian indicator) rose to +0.14, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.61 and remains very bullish. In our view, it is the one bright spot on the data dashboard.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 24.3/44.6%.
Disconcerting Valuation
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw a minor dip to $223.50 per share. As such, the valuation gap widened and is still a bit disconcerting with the S&P's forward P/E multiple at 18.6x versus the "rule of 20" ballpark fair value of 16.4x.
The S&P's forward earnings yield is 5.37%.
The 10-Year Treasury yield closed higher at 3.58% and just below resistance. It is in a short-term bullish trend. We see support at 3.47% and resistance at 3.59%.
Bottom Line
Wednesday's rally produced marked improvement on the charts while the data are largely neutral except for investor psychology, which is a potential source for positive action as the crowd may start funneling funds back into equities. However, valuation is extended while breadth is debatable. Selectivity remains key.
