Too far, too fast or just right?
After a shortened trading week that saw all the major equity indexes close higher on Friday, have the scales tipped one way or the other?
All the indexes closed near their session highs, which resulted in several positive technical chart developments registered, as discussed below. Importantly, cumulative market breadth improved as well. However, the surge has pushed the McClellan 1-day OB/OS Oscillators into overbought territory, suggesting the potential for some pause or consolidation of the recent strength.
And the cautionary side of the scales is still being impacted by what appears to be current overvaluation of the S&P 500.
Let's dig deeper and see how investors and traders should play this market right now.
Multiple Positive Chart Events Registered
Chart Source: Worden
On the charts, all the major equity indexes closed higher Friday with positive NYSE and Nasdaq internals.
All closed near their intraday highs, which resulted in the following positive chart events being registered: The S&P 500 (see above), DJIA, Dow Jones Transports, MidCap 400, Russell 2000 and Value Line Arithmetic Index all closed above resistance with the DJIA, Dow Transports, MidCap and Value Line index closing above their near-term downtrend lines.
We now also find all the indexes trading above their 50-day moving averages.
As such, there are no near-term bearish trends present, with the S&P, Nasdaq Composite, Nasdaq 100, Russell 2000 (page 3), and Value Line index near-term bullish and the rest neutral.
Cumulative market breadth improved as well with the advance/decline lines for the All Exchange and NYSE turning bullish as the Nasdaq's remains neutral.
The stochastic levels for the S&P 500, Nasdaq Composite and Nasdaq 100 remain overbought but have yet to register bearish crossover signals.
McClellan OB/OS Oscillators Overbought as
The data dashboard remains largely neutral.
However, the 1-day McClellan Overbought/Oversold Oscillators are now overbought as a result of Friday's rally and, in our view, suggest some pause or consolidation of recent gains (All Exchange: +55.48 NYSE: +62.96 Nasdaq: +52.02).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, rising to 51%.
The Open Insider Buy/Sell Ratio slipped slightly to 72.0 and also remains neutral.
The detrended Rydex Ratio (contrarian indicator) dipped to +0.16, also staying neutral.
Last week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.51 and remained just inside very bullish territory. In our view, it is still encouraging, but a bit less so.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) was still neutral at 23.9/46.5%.
Valuation Gap Widens
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw a lift to $223.17 per share. However, the valuation gap widened and is still disconcerting with the S&P's forward P/E multiple at 19.2x versus the "rule of 20" ballpark fair value of 16.3x, suggesting valuation is extended.
Its forward earnings yield is 5.21%.
The 10-Year Treasury yield closed higher at 3.69%. It is short-term neutral with support at 3.56% and resistance at 3.81%.
Bottom Line
The positive side of the scales is being helped by the improving chart technicals and market breadth. However, the overbought McClellan OB/OS and stretched valuation are counterbalancing and suggesting a pause or consolidation of gains may offer better buying opportunities over the near term.
