It appears that the period of consolidation of significant recent market gains we have been expecting has been initiated as all the charts closed near their lows of the day Thursday. All but one violated their near-term uptrend lines and are now neutral versus bullish in that regard. Importantly, only one index violated support.
Meanwhile, two of the three 1-day McClellan OB/OS Oscillators have shifted back to neutral from their prior overbought and cautionary levels suggesting, we believe, a tempering of their prior warning signs. Also, the valuation gap narrowed to some degree.
As such, the consolidation action we have been expecting may have been initiated, suggesting some sideways moves over the near term.
On the Charts
All the major equity indexes closed lower Thursday with negative internals on heavier trading volumes on the NYSE and Nasdaq.
Selling pressure was consistent throughout the session, leaving all at or near their intraday lows at the close.
Only the Dow Jones Transports was able to maintain its near-term uptrend as the rest were violated leaving all but the Transports in near-term neutral trends versus their prior bullish projections.
All support levels held except for the Russell 2000 (see above).
Market breadth suffered a bit as well. While the NYSE cumulative advance/decline line remains positive and above its 50-day moving average, the positive All Exchange A/D is below its 50 DMA with the Nasdaq now neutral and below its 50 DMA as well.
A bearish stochastic crossover was registered on the MidCap 400.
The McClellan 1-Day Overbought/Oversold Oscillator is mostly neutral as opposed to their previous overbought levels that may imply a lessening of weight on the markets (All Exchange: +41.24 NYSE: +51.84 Nasdaq: +35.12).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dipped to 62% and remains neutral.
The Open Insider Buy/Sell Ratio declined to 50.6, also staying neutral.
The detrended Rydex Ratio (contrarian indicator) rose to +0.07 and is neutral versus its prior bullish implications near the market lows.
This week's AAII Bear/Bull Ratio (contrarian indicator), while dipping, remains bullish at 1.65 while the Investors Intelligence Bear/Bull Ratio (contrary indicator) is 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 in play.
Market Valuation and Yields
The valuation gap narrowed a bit with the forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 lifting to $228.42 per share. As such, the S&P's forward P/E multiple stands at 19.8x with the "rule of 20" finding ballpark fair value at 17.7x.
The S&P's forward earnings yield is now 5.04%.
The 10-Year Treasury yield closed lower at 2.33%. We view resistance as 2.64% while support remains at 2.0%.
Friday's action suggests to us the consolidation of gains we thought likely has been initiated and now implies some sideways action over the near term before resuming an upward path.