As we close out another busy week for the market, a continuing theme has been how a select number of big-cap technology stocks are driving the indexes higher.
All the major equity indexes closed higher on Thursday near their highs of the session, which resulted in multiple violations of resistance. And while the charts improved, so did the market breadth, which we believe is necessary for the rally's credibility.
Meanwhile, the data dashboard remains almost entirely neutral except for crowd psychology via the AAII Bear/Bull Ratio (see below), suggesting potential for more funds being funneled back into equities.
However, the S&P 500's forward valuation valuation gap continues to be of concern, as discussed below.
As such, while recent strength may continue, we believe buying should continue to be done on a very selective basis.
Charts & Breadth Continue to Improve
Chart Source: Worden
On the charts, all the major equity indexes closed higher Thursday with positive internals on the NYSE and Nasdaq.
All closed near their session highs that saw the S&P 500, Nasdaq Composite (see above), Nasdaq 100, Dow Joes Transports, MidCap 400 and Value Line Arithmetic Index close above resistance.
Also, the MidCap 400 and Value Line index closed above their 50-day moving averages.
As such, the S&P, Nasdaq Composite and Nasdaq 100 are near-term bullish; the DJIA, MidCap 400, Russell 2000 and Value Line index are neutral; the Dow Transports are still negative.
Cumulative market breadth saw some further improvement with the NYSE A/D turning positive as the All Exchange and Nasdaq shifted to neutral from negative, adding to the viability of the rally.
The Nasdaq Composite and Nasdaq 100 stochastic levels remain overbought but have not triggered bearish crossover signals thus far as the rest are neutral.
Data Remains Neutral
The data dashboard still remains largely neutral despite the strength.
The 1-day McClellan Overbought/Oversold Oscillators are all neutral and non-threatening (All Exchange: +18.71 NYSE: +9.62 Nasdaq: +26.87).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral lifting to 49%.
The Open Insider Buy/Sell Ratio fell to 76.7. It remains neutral as prior insider buying has slackened over the past few weeks.
The detrended Rydex Ratio (contrarian indicator) dipped to +0.10, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) rose to 1.61 and remains very bullish. In our view, it is the one bright spot on the data dashboard.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 24.3/44.6%.
Valuation Gap Widens
The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw a drop to $223.38 per share. As such, the valuation gap widened and is still a bit disconcerting with the S&P's forward P/E multiple lifting to 18.8x versus the "rule of 20" ballpark fair value is 16.4x.
The S&P's forward earnings yield is 5.32%.
The 10-Year Treasury yield closed higher at 3.65% and above resistance. It is in a short-term bullish trend. We see support at 3.50% and new resistance at 3.70%.
Bottom Line
The notable improvements on the charts and market breadth in combination with largely neutral data suggest the current rally may have further to go. However, extended valuation is a concern that tempers our enthusiasm to the point of suggesting any buying should be done selectively.
