The major equity indexes saw several technical improvements Friday. Multiple resistance levels were violated as well as some near-term downtrend lines, leaving all the charts in near term neutral patterns. Cumulative market breadth strengthened as well.
However, we remain concerned about two troubling and counterbalancing issues: insider selling and valuation (see below).
Indeed, we see the near-term market environment at somewhat of a standoff.
Index Charts See Technical Improvements
Chart Source: Worden
On the charts, the major equity indexes closed higher Friday with positive internals.
All closed near their highs of the day as the S&P 500, DJIA, Nasdaq 100 (see above), Russell 2000 and Value Line Arithmetic Index all closed above their respective resistance levels.
As well, the MidCap 400 and Russell 2000 closed above their near-term downtrend lines leaving all the charts short-term neutral.
Cumulative market breadth joined in as the advance/decline lines for the All Exchange and NYSE turned bullish and the Nasdaq neutral.
Bullish stochastic crossovers were also registered on the S&P, DJIA, Nasdaq Composite and Nasdaq 100.
Insiders Increase Selling Activity
On the data dashboard, the 1-Day McClellan Overbought/Oversold Oscillators are all back in neutral territory from oversold (All Exchange: -7.68 NYSE: -6.44 Nasdaq: -8.97).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 52% and remains neutral.
However, the Open Insider Buy/Sell Ratio continues to be a fly in the ointment. It remains cautionary as corporate insiders, who have been very active sellers, have yet to show any important sign of buying interest as it dropped to a bearish 18.9.
The detrended Rydex Ratio (contrarian indicator) slipped to -0.09 and is neutral.
Last week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 0.99 as bearish sentiment increased but remained neutral.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) was neutral at 59.9.
Valuation Stretches Further
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 slid to $220.29 per share and continues to be a problem as it remains at a significant premium stretching to a P/E multiple of 18.4x versus the "rule of 20" ballpark fair value at 16.0x. Said valuation, in our opinion, continues to leave little margin for error for equities.
The S&P's forward earnings yield is 5.44%.
The 10-Year Treasury yield closed lower at 3.96%. It is now in short-term neutral with support at 3.90% and resistance at 4.13%, by our analysis.
Our Market Outlook
While there is a lot to celebrate regarding the chart action and market breadth on Friday, we find ourselves perplexed by the fact that insiders are active sellers while valuation gap remains wide. Thus, we are extremely selective buyers while not chasing price.
