Last week's strong market performance has pushed the 1-day McClellan Oscillators into overbought territory. And when combined with the widening spread in valuation (see below), we suspect they portend a period of consolidation over the near term.
As we have been stating for the past several sessions, we think not chasing price and buying on weakness near support is the most appropriate approach currently.
Uptrends Persist on Strong Breadth
On the charts, all the major equity indexes closed higher on Friday with positive internals as most closed near their session highs. The only index not to close above resistance was the DJIA (page 2) as the rest made a higher high with higher lows.
The action left all the charts in near-term bullish trends as the Nasdaq Composite (see above) and Nasdaq 100 joined the rest of the charts in that regard.
Cumulative market breadth also improved as the cumulative advance/decline lines for the All Exchange, NSYE and Nasdaq are all positive and above their 50-day moving averages.
Only the Dow Jones Transports is overbought on its stochastic reading and has yet to trigger a bearish crossover signal.
McClellan OB/OS Oscillators & Valuation Suggest Pause/Consolidation
The McClellan Overbought/Oversold Oscillators are, not surprisingly, overbought given the recent strength with the NYSE very overbought (All Exchange: +82.41 NYSE: +103.16 Nasdaq: +68.8). Once again, we suspect they present some headwind for the very near term.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed at 81% and mildly bearish.
The Open Insider Buy/Sell Ratio is unchanged at 41.6, also staying neutral.
The detrended Rydex Ratio, (contrarian indicator), which had been on a very bullish signal prior to the rally, is at -1.54 as the leveraged EF traders remain leveraged short. It remains in bullish territory as it represents potential demand.
Last week's AAII Bear/Bull Ratio (contrarian indicator) dipped to 1.69 but also remained on a very bullish signal as is the Investors Intelligence Bear/Bull Ratio (contrary indicator), at 37.3/35.8, as bears continued to outweigh bulls.
Valuation Stretches Further
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 saw a slight uptick to 226.00 per share. As such, its forward P/E multiple is 17.7x and at a premium to the "rule of 20" ballpark fair value of 16.2x.
The SPX forward earnings yield is 5.66%.
The 10-Year Treasury yield closed lower at 3.81%. We view support as 3.80% with resistance at 4.33%.
Last week's strength leaves the 1-day McClellan OB/OS cautionary while valuation has become a bit more stretched. So, while we are generally constructive in our outlook, we believe some pause/consolidation of the recent gains may offer better buying opportunities ahead. We continue to suggest buying weakness near support.