The smaller guys continue to come up big.
There was notable apparent rotation out of the mega-caps into the mid-and small-cap issues Wednesday.
While two indexes closed above resistance, two others closed below their accelerated uptrend lines, suggesting a possible near-term peak for them (see below).
While the chart trends and market breadth are largely bullish, we believe it may now be appropriate to become more defensive as insiders continue selling, stochastic and McClellan OB/OS Oscillators are overbought while valuation remains notably stretched and the VIX is at a three-year low.
In our view, the potential for a correction is increasing.
Indexes Close Mixed Due to Rotation
Chart Source: Worden
On the charts, the major equity indexes closed mixed Wednesday with positive NYSE and Nasdaq internals on higher volume.
Several closed near their session highs that saw the Dow Jones Transports and Value Line Arithmetic Index close above their resistance levels, with the Transports turning bullish from neutral.
Currently, all indexes except the DJIA are in near-term bullish trends. However, the Nasdaq Composite and Nasdaq 100 (see above), which have been on a tear, closed below the second acceleration of their near-term uptrend lines, suggesting they may have seen a near-term top established with potential for more downside.
Cumulative market breadth remains positive for the All Exchange, NYSE and Nasdaq and above their 50-day moving averages.
However, all but the Dow Transports are overbought on their stochastic readings, although bearish crossover signals have yet to appear.
Also, the VIX is at a three-year low, which implies the possibility of volatility entering the market is on the rise.
Some Data Suggest Getting More Defensive
The data dashboard is still sending some cautionary signals.
The 1-day McClellan Overbought/Oversold Oscillators are all in overbought territory (All Exchange: +70.89 NYSE: +84.7 Nasdaq: +63.41) and suggesting some caution is advisable.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, lifting to 57%.
However, the Open Insider Buy/Sell Ratio declined again to 47.1 from 54.7 as insiders have been steadily decreasing their buying activity of late. While it remains neutral, insiders have increased their selling activity.
The detrended Rydex Ratio (contrarian indicator) rose to +0.56, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) slipped to 1.46 and is now bullish versus its prior very bullish implications. In our view, it is still encouraging, but less so.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 23.3/47.9%.
Valuation
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 slipped to $223.05 per share. Our concern persists as the valuation gap is quite wide and still disconcerting with the S&P's forward P/E multiple at 19.2x versus the "rule of 20" ballpark fair value of 16.2x, suggesting valuation is quite extended.
The S&P's forward earnings yield is 5.23%.
The 10-Year Treasury yield closed higher at 3.78%. It is short-term neutral with support at 3.56% and resistance at 3.81%.
Bottom Line
While the charts and breadth look good, there are several issues noted above that suggest to us that a more defensive posture is now appropriate as the potential for a correction appears to be on the rise.
