Following Wednesday's market rally, all the major equity indexes remain in near-term bullish trends.
Yet, while the charts have yet to generate any signals suggesting the recent rally has peaked, the cautionary data signals we discussed here Wednesday have intensified their warnings.
In our opinion, the data suggest some tempering of recent market strength, which implies some near-term caution/patience is appropriate before committing more funds to equities. We would be buyers of weakness, preferably near support.
All But One Index Close Above Resistance
Chart Source: Worden
On the charts, all the major equity indexes closed higher Wednesday with positive internals on higher volume. All closed near their highs of the day with only the Nasdaq Composite (see above) failing to close above resistance.
The action left all the index charts in near-term bullish trends while the Nasdaq 100 (QQQ) closed back above its 50-day moving average, leaving all in that condition as well.
Cumulative market breadth continued to strengthen with the advance/decline lines for the All Exchange NYRE and Nasdaq positive and above their 50 DMAs.
However, all the stochastic readings are well into overbought territory. While they have yet to trigger bearish crossover signals, they are worth noting.
Cautionary Data Signals Intensify
On the data front, the cautionary signals noted Wednesday intensified further. In our opinion, while the charts are bullish, the data appear to be telling us some near-term patience is appropriate as the signals imply some consolidation of the rally that may likely present better buying opportunities.
The McClellan Overbought/Oversold Oscillators are all very overbought (All Exchange: +118.37 NYSE: +131.33 Nasdaq: +109.8). They suggest some consolidation as becoming more likely over the near term.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 75.0%, staying neutral but just shy of turning bearish.
The Open Insider Buy/Sell Ratio remains neutral as it dropped to 25.6 and is now mildly bearish.
The detrended Rydex Ratio (contrarian indicator) declined further to -1.82 as the leveraged ETF traders became more leveraged short. It remains on a bullish signal and a potential upside catalyst, in our opinion.
This week's AAII Bear/Bull Ratio (contrarian indicator) moved higher to 2.11 as bearish sentiment increased and on a very bullish signal.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is bullish at 33.81/36.6 as the number of bears rose and bulls declined.
Valuation Remains at a Premium
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped to $227.16 per share. As such, its forward P/E multiple is 17.5x and remains at a premium to the "rule of 20" ballpark fair value of 16.5x.
The S&P's forward earnings yield is 5.72%.
The 10-Year Treasury yield closed lower at 3.55%. We view support as 3.51% and resistance at 3.77%.
Our Near-Term Market Outlook
While the market have fluctuated Thursday after the CPI report, some patience for buying may be appropriate here but within a generally bullish environment.