Each of the major equity indexes its respective resistance level Tuesday, but none were able to violate on a closing basis. As such, all the near-term chart trends remain bullish.
Looking at the data, the McClellan Oscillators moved back into overbought territory, which may present some headwind for the near term. Yet, the psychology data is a counterbalancing factor, as the crowd remains bearish and the contrarian detrended Rydex ratio finds the leveraged ETF traders accelerated their already extended leveraged short exposure.
When all factors are taken into account, we remain optimistic in our overall outlook but suspect better buying opportunities may be in the offering.
All Index Charts Test Resistance
Source: Worden
On the charts, all the major equity indexes closed higher Tuesday with positive internals on higher volume on the NYSE and Nasdaq. All closed near their midpoints after testing resistance intraday but failing to violate on the close.
The session left all the charts in near-term bullish trends and above their 50-day moving averages.
Market cumulative breadth remains bullish as well, with the advance/decline lines for the All Exchange, NYSE and Nasdaq still in uptrends and above their 50 DMAs.
All the stochastic levels are overbought but have yet to register bearish crossover signals.
McClellan Oscillators Back to Overbought as Psychology Data Stay Bullish
The McClellan Overbought/Oversold Oscillators have moved back into overbought territory and may act as a drag on progress over the very near term, in our opinion (All Exchange: +74.36 NYSE: +89.75 Nasdaq: +64.81).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) turned mildly bearish as it rose to 80%.
The Open Insider Buy/Sell Ratio slipped to 36.1 as insiders dampened their enthusiasm for buying their stock to some degree, also staying neutral.
The detrended Rydex Ratio (contrarian indicator), however, dropped to -1.61 and remains bullish as the leveraged ETF traders expanded their already heavily leveraged short exposure. In our view, it still represents potential demand.
This week's AAII Bear/Bull Ratio (contrarian indicator) (see below) dipped to 1.53 but remained on a very bullish signal with the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 36.6/35.2 as bears continued to outweigh bulls and bullish.
The AAII Bear/Bull Ratio is 1.53 (very bullish)
S&P 500 Valuation Widens Its Premium
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 slipped to $225.57 per share. As such, its forward P/E multiple is now 17.7x and at a premium to the "rule of 20" ballpark fair value of 16.2x.
The S&P's forward earnings yield is 5.65%.
The 10-Year Treasury yield closed lower at 3.8%. We view support as 3.80%, with resistance at 4.08%. We would also note it closed below its 50-day moving average.
Our Market Outlook
We continue to believe the equity markets have seen their lows that, with the charts and sentiment on green lights, imply the outlook is constructive. However, valuation has become a bit extended with the OB/OS levels overbought, suggesting waiting for weakness as buying opportunities.
