As the indexes closed at various points within their intraday ranges Monday, the end result was all remain in near-term uptrends while cumulative market breadth remains neutral.
However, there were some notable shifts in sentiment (contrarian indicators) resulting in less encouraging data as the level of bearish investor expectations cooled to the point that it now is expected to have less of a positive influence on the markets. Also, the S&P 500's valuation has become more stretched.
So, while we remain generally constructive in our outlook, sentiment and valuation suggest some degree of tempering of enthusiasm on our part. Not chasing price and buying weakness near support becomes even more important, in our view.
Indexes Close Mostly Lower with Uptrends Intact
On the charts, the major equity indexes closed mostly lower with only the Dow Jones Transports posting a gain as internals were negative on the NYSE and Nasdaq.
However, the losses had no impact on the current trend structures that remain near-term bullish on all with all still above their 50-day moving averages. No violations of support or trend occurred.
Market breadth remains neutral for the All Exchange, NYSE and Nasdaq cumulative advance/decline line while no stochastic signals were generated.
Investor Sentiment Data Cools as Valuation Remains Stretched
The McClellan Overbought/Oversold Oscillators remain neutral across the board (All Exchange: +22.05 NYSE: +36.2 Nasdaq: +12.98).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) remains mildly bearish at 82%.
The Open Insider Buy/Sell Ratio saw an uptick to 44.2, staying neutral.
The detrended Rydex Ratio, (contrarian indicator) rose further to -0.97 and is now only mildly bullish versus its prior bullish implications. The significant amount of short-covering on the part of the leveraged ETF traders in the recent rally suggests it now may have less of a positive influence on the markets.
The same can be said for the AAII Bear/Bull Ratio (contrarian indicator) as its new reading slipped to 1.35 and is now bullish versus its very bullish signal of late.
The AAII Bear/Bull Ratio is 1.35 (bullish)
Also, the new Investors Intelligence Bear/Bull Ratio (contrary indicator) at 32.8/38.6 now finds bulls outnumbering bears for the first time in several weeks, turning from very bullish to neutral.
Valuation Remains Stretched
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dropped to $224.83 per share. As such, its forward P/E multiple is 17.6x and at a premium to the "rule of 20" ballpark fair value of 16.2x.
The S&P 500 forward earnings yield is 5.69%.
The 10-Year Treasury yield closed higher at 3.83%. We see support as 3.56% with resistance at 3.95%.
Our Near-Term Market Outlook
While the charts remain healthy with uptrends that should be respected until proven otherwise, the less bullish implications from the sentiment data combined with valuation suggest buying weakness near support versus chasing price has become more necessary.
