The rally we had been suggesting was forthcoming did, in fact, occur. And while Friday's action resulted in some of the indexes' trends turning neutral from negative, while the rest remain in near-term downtrends, the data continue to imply the potential for further strength, possibly resulting in more tests and violations of resistance and near-term downtrends.
Let's take a closer look at the charts and indicators.
On the Charts
All the major indexes saw notable gains at the close of Friday's trading as all but the Dow Jones Transports closed near their highs of the day. Internals were broadly positive on the NYSE and Nasdaq.
Technical improvements were registered on the S&P 500 (see above) DJIA and Dow Jones Transports as they closed above their near-term downtrend lines and are now neutral versus their prior negative trends, The rest are still in downtrends.
Market breadth saw some improvement as well as the cumulative advance/decline lines for the All Exchange and NYSE turned neutral from negative while the Nasdaq remains negative.
The stochastic levels are oversold on all the charts and near bullish crossover signals. Said signals have not been generated.
Despite the surge of the last session, the data, which had been suggesting the rally, continue to send generally very bullish signals with investor sentiment (contrarian indicators) remaining at historically high levels of bearish expectations.
The McClellan 1-Day Overbought/Oversold oscillators moved to neutral from oversold but are not yet in overbought territory (All Exchange: -19.78 NYSE: -18.83 Nasdaq: -19.55).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 21% and remains on a bullish signal and near its lowest level in two years.
The Open Insider Buy/Sell Ratio rose notably to 103.7, remaining neutral but showing more buying activity by insiders than any other time since the February market lows.
The most encouraging data factor for the near-term, in our view, remains the sentiment data:
The detrended Rydex Ratio (contrarian indicator) remains very bullish, sliding to -2.53 as the leveraged ETF traders expanded their leveraged short exposure. Its chart, below, shows only five times in the past decade have the ETF traders been so heavily leveraged short, all of which were followed by rallies.
The detrended Rydex Ratio is -2.53 (very bullish)
Last week's AAII Bear/Bull Ratio (contrarian indicator) was a very bullish 2.75 and at a 20-year peak matched only by the 2008-2009 financial crisis as investment banks collapsed.
Also, the Investors Intelligence Bear/Bull Ratio (contrary indicator) was on a very bullish signal and at a decade peak of fear at 39.3/30.9. Crowd fear remains at very extreme levels.
S&P 500 Valuation and Treasury Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped to $235.55 per share. Thus, the S&P's forward P/E multiple is 17.1x and in line with the "rule of 20" finding ballpark fair value at 17.1x.
The S&P's forward earnings yield is 5.85%.
The 10-Year Treasury yield closed higher at 2.9%. We view support as 2.5% and resistance at 3.2%.
Our Near-Term Market Outlook
While there may be some backing & filling, the data suggests more strength to come.