All the major equity indexes closed higher yesterday except for the DJI posting a loss. All closed near their intraday highs on heavy trading volume as, again, all but the DJI closed above their respective resistance levels.
As almost all the equity indexes closed near their highs Thursday and breadth remains strong as well, some of the market's data are sending tremors of caution.
The McClellan OB/OS Oscillators are well into overbought territory while forward 12-month earnings estimates for the S&P 500 continue to erode to the point that the index is now trading at a significant premium to ballpark fair value.
So, while the charts have yet to send any sell signals, these other factors suggest we may be seeing a peak within the recent rally. We believe the prudent approach to equities should now be one where patience for better buying opportunities trumps chasing price.
Charts Remain Strong
Chart Source: Worden
On the charts, all the major equity indexes but the DJIA (see above) closed higher Thursday with positive NYSE and Nasdaq internals as volumes were also heavy on both.
All closed near their session highs as all but the DJIA managed to close above their respective resistance levels.
All remain in bullish near-term trends and above their 50-day moving averages and lacking sell signals. However, we would note price is extended well above said 50 DMAs on all, again except for the DJIA.
Cumulative market breadth remains very healthy as well, giving credibility to the gains.
Regarding the stochastic levels, they remain overbought but have yet to trigger bearish crossover signals.
Some Data Warn as McClellan OB/OS Oscillators Overbought
The data dashboard is neutral with the exception of the 1-day McClellan Overbought/Oversold Oscillators that are well into overbought territory and, in our opinion, waving yellow flags (All Exchange: +90.2 NYSE: +9+7.97 Nasdaq: +87.67).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 74% and remains on a neutral signal.
The Open Insider Buy/Sell Ratio lifted to 41.8 and is neutral as well. They were buyers within the rally.
The detrended Rydex Ratio (contrarian indicator) rose slightly to -0.62 and is also neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.32 as bearish sentiment declined but remains bullish.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 28.2/45.1 as bears and bulls both declined.
Valuation Spread Widens Further
Of concern is the forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 continue to slide. Now dropping to $218.77 per share, its forward P/E multiple is 19.1x and at a significant premium to the "rule of 20" ballpark fair value of 16.5x. It remains a cause for concern, in our view.
The S&P's forward earnings yield is 5.23%.
The 10-Year Treasury yield closed lower at 3.4%. It is in a short-term negative trend with support at 3.4% and resistance at 3.67%.
There is virtually nothing to argue with on the charts that have yet to send cautionary signals. Yet the widening valuation gap and the addition of the OB/OS levels are disconcerting enough to suggest to us some near-term caution may be warranted while waiting for more opportunistic buying levels.