The valuation gap has narrowed on the S&P 500, while broadly negative investor sentiment, a contrarian signal, remains encouraging.
All good for a resumption of the rally? Not so fast...
Friday's trading session ended with all the index charts in near-term neutral patterns while several saw bearish stochastic crossover signals generated. Meanwhile, the data find most of the McClellan OB/OS Oscillators back in overbought territory.
As such, we expect some further consolidation of the recent rally is likely to occur for the near-term.
On the Charts
All the major equity indexes but the Dow Jones Transports (-4.74%) (see above) closed higher Friday with generally positive internals as trading volumes declined on both exchanges.
All closed near their highs of the day except for the Dow Transports, which closed near its low as it violated its near-term uptrend and support. The Transports action shifted its near-term trend to neutral from positive, joining the rest of the charts in that condition.
Cumulative market breadths saw some improvement with the All Exchange, NYSE and Nasdaq neutral as both the All Exchange and NYSE reclaimed their 50-day moving averages.
However, cautionary bearish stochastic crossover signals were generated on the S&P 500, DJIA, Nasdaq Composite, Nasdaq 100 and Value Line Arithmetic Index.
The McClellan 1-Day Overbought/Oversold is back in overbought territory for the All Exchange and NYSE with the Nasdaq's remaining neutral (All Exchange: +53.42 NYSE: +68.05 Nasdaq: +44.38).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) was unchanged at 62% and remains neutral.
The Open Insider Buy/Sell Ratio declined to 47.9, also staying neutral.\
The detrended Rydex Ratio (contrarian indicator) rose to +0.48 and is neutral versus its prior bullish implications near the market lows.
Last week's AAII Bear/Bull Ratio (contrarian indicator), while dipping, remained bullish at 1.65 while the Investors Intelligence Bear/Bull Ratio (contrary indicator) was at 35.31/36.3, near peak fear levels seen four times over the past decade, each of which was also followed by a notable rally such as the one recently achieved.
Market Valuation and Yields
The valuation gap has narrowed with the forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 lifting to $233.82 per share from $228.42. As such, the S&P's forward P/E multiple stands at 19.4x with the "rule of 20" finding ballpark fair value at 17.6x.
The S&P's forward earnings yield is now 5.14%.
The 10-Year Treasury yield closed higher at 2.38%. We view resistance as 2.64% while support remains at 2.0%.
The cautionary OB/OS levels and stochastic signals are, in our view, somewhat counterbalanced by the uptick in earnings estimates and continued bearish crowd sentiment. Their combination suggests more near-term consolidation is the higher probability before further progress can be made.