More technical advances were seen on the charts Tuesday with several equity indexes violating their near-term resistance levels. All are now in near-term bullish trends while cumulative market breadth remains quite healthy.
The data remain generally neutral although the 1-Day McClellan OB/OS Oscillators are now back into overbought territory while valuation remains stretched.
Thus, we are somewhat conflicted in our short-term outlook as cautionary sell signals on the charts or market breadth have yet to appear, implying said trends should continue to be respected, while the OB/OS and valuation are on yellow lights.
As such, our bullish outlook from a few weeks ago is somewhat tempered as we believe it prudent to wait for some market weakness to afford better buying opportunities.
Market Strength Persists with Resistance Violated
Chart Source: Worden
On the charts, all the major equity indexes closed higher Tuesday with broadly positive NYSE and Nasdaq internals on heavier volume. All closed near their intraday highs.
More technical improvements were registered as the DJIA, MidCap 400, Russell 2000 and Value Line Arithmetic Index closed above their respective resistance levels while the Dow Jones Transports closed back above its near-term uptrend line and is now positive as are all the other charts.
Market breadth remains solid and above the 50 DMA for the All Exchange, NYSE and Nasdaq.
Some stochastic levels remain overbought, but all have failed to signal bearish crossover readings thus far.
McClellan OB/OS Oscillators Overbought
The data dashboard is almost entirely neutral.
However, the 1-day McClellan Overbought/Oversold Oscillators have shifted back into overbought territory (All Exchange: +58.37 NYSE: +71.4 Nasdaq: +51.08).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 73% and is on a neutral signal.
The Open Insider Buy/Sell Ratio lifted to 39.6 and is neutral as well. They have been buyers within the rally.
The detrended Rydex Ratio (contrarian indicator) was unchanged at -0.63 and is also neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.32 as bearish sentiment declined but remains bullish.
The AAII Bear/Bull Ratio is 1.32 (bullish)
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 28.2/45.1 as bears and bulls both declined.
Valuation Spread Widens Further
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 took a notable hit dropping to $219.45 per share from $223.30. As such, its forward P/E multiple rose to 18.6x, a significant premium to the "rule of 20" ballpark fair value of 16.5x. It is a cause for concern, in our view.
The S&P's forward earnings yield is 5.38%.
The 10-Year Treasury yield closed lower at 3.53%. It is in a short-term negative trend with support at 3.4% and resistance at 3.67%.
Our Market Outlook
There is virtually nothing to argue with on the charts, which have yet to send cautionary signals. Yet the widening valuation gap with the addition of the OB/OS levels are disconcerting enough to suggest to us some near-term caution may be warranted while waiting for more opportunistic buying levels.
