After looking at the latest charts and indicators, what the best path forward for investors?
Importantly, in our view, all the charts of the major equity indexes remain near-term bullish and above their 50-day moving averages as support levels continue to hold.
Meanwhile, while most of the indicators are neutral, the continued excess of bearish sentiment (contrarian indicators) continues to suggest there is plenty of fuel to move the markets higher as the bears are eventually drawn back in. We believe the one cautionary outlier is valuation, which has widened its gap above ballpark fair value for the S&P 500.
Taking this all together, we believe the most sensible approach is to buy weakness near support when those opportunities arise.
Now let's dig deeper.
Indexes Dip Lower But Hold Uptrends & Support
Chart Source: Worden
On the charts, all the major equity indexes closed lower Thursday with negative internals on lighter trading volume. All closed near their highs of the session as traders saw the weakness as a buying opportunity.
The net result was all the index charts remain in near-term bullish trends and above their 50-day moving averages as all support levels also held.
Cumulative market breadth did see some erosion as the advance/decline lines for the All Exchange, NYSE and Nasdaq turned neutral from bullish.
Also, bearish stochastic crossover signals were generated on the Nasdaq Composite (see above), Dow Jones Transports, MidCap 400 and Value Line Arithmetic Index.
Sentiment Data Remain Bullish With Rest Mostly Neutral
The McClellan Overbought/Oversold Oscillators remain neutral across the board as their prior caution signals dissipated further (All Exchange: +14.28 NYSE: +23.95 Nasdaq: +8.01).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dipped to neutral at 78%.
The Open Insider Buy/Sell Ratio saw a slight downtick to 34.9, staying neutral.
We continue to highlight the detrended Rydex Ratio, (contrarian indicator), as the leveraged ETF traders continue to have highly leveraged short exposure at a bullish -1.71. We reiterate that, as a contrarian indicator, it represents potential demand.
The detrended Rydex Ratio is -1.71 (bullish)
This week's AAII Bear/Bull Ratio (contrarian indicator) 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.
Valuation Gap Widens
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 slipped further to $225.16 per share. As such, its forward P/E multiple is now 17.5x and at a premium to the "rule of 20" ballpark fair value of 16.2x.
The S&P's forward earnings yield is 5.7%.
The 10-Year Treasury yield closed higher at 3.78%. We see support as 3.56% with resistance at 3.95%.
Our Market Outlook
Thursday's buying interest after a weak open left all the charts and support levels intact and encouraging. And while the data is generally neutral with the psychology indicators bullish, the valuation gap suggests to us that waiting for weakness as buying opportunities remains the most appropriate approach for the near term.