All the major equity indexes closed significantly higher Wednesday after Fed Chair Powell's comments signaling an easing of his prior hawkish view regarding future interest rate hikes. Money poured into stocks with extremely high demand as noted by the surge in trading volumes and positive internals. All the indexes closed at or near their intraday highs with multiple technical improvements on the charts while cumulative market breadth improved as well.
On the other hand, the data are now more mixed while the valuation gap has stretched further as discussed below. Yet the psychology data is not flashing any cautionary signals at this time.
As such, as has been the case for the past several weeks, we remain of the opinion that the charts are constructive with uptrends that should be respected while looking for opportunities to buy on weakness. So far, that has been a successful approach.
Charts & Market Breadth Improve
Chart Source: Worden
On the charts, all the major equity indexes closed higher Wednesday with very impressive gains on very high volumes with positive internals on the NYSE and Nasdaq.
All closed near their highs of the day with the S&P 500 (see above), Nasdaq 100, Midcap 400 and Value Line Arithmetic Index closing above resistance.
As well, the DJIA and Nasdaq Composite closed back above their near-term uptrend lines leaving all the indexes in short term bullish trends and above their 50 DMAs.
Also, the S&P 500 managed to close above its 200-day moving average (see above).
Market breadth improved with the cumulative advance/decline line for the Nasdaq turning positive and above its 50 DMA, joining the All Exchange and NYSE in that status.
No stochastic signals were generated.
Data: Mixed and Overbought
Two of the McClellan Overbought/Oversold Oscillators moved into overbought territory with the Nasdaq staying neutral (All Exchange: +56.18 NYSE: +78.48 Nasdaq: +42.34).
However, the % of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) remains in bearish territory at 92% and at its highest reading for the past two years.
% of SPX Stocks Above their 50 DMAs is 92% (Bearish)
The Open Insider Buy/Sell Ratio rose to 54.1, staying neutral.
The detrended Rydex Ratio, (contrarian indicator) lifted to -0.54, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.46, remaining bullish, versus its very bullish signal prior to the rally.
Also, the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 30.5/41.7 remains neutral with bulls now outnumbering bears.
Valuation Gap Continues to Widen
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 saw another small uptick to $224.68 per share from $224.32. As such, the S&P's forward P/E multiple rose to 18.2x and remains at a sizable premium to the "rule of 20" ballpark fair value of 16.3x.
The S&P's forward earnings yield dropped to 5.5%.
The 10-Year Treasury yield closed lower at 3.7%. We see support as 3.56% with resistance at 3.95%.
Bottom Line
Wednesday saw an important shift in investor willingness to participate in the recent rally. While the psychology data has yet to flash any important cautionary signals, the valuation gap is fairly wide. Thus, we continue to suggest that uptrends should be respected while waiting for weakness to provide more opportune buying levels.
