With Wednesday's post-Fed decision rally, near-term trends for the major equity indexes turned neutral from negative as well as all saw multiple technical improvements.
What may be of greatest importance right now, however, is the fact that Wednesday's gains still find "the crowd" at extreme levels of fear. The detrended Rydex ratio (see below) that forecasted yesterday's gains still finds the ETF traders very heavily leveraged short.
What Happened on the Charts?
All the major equity indexes closed higher Wednesday with positive internals on the NYSE and Nasdaq on higher trading volumes.
The sizable gains moved every index except the Russell 2000 above resistance while all but the Nasdaq 100 closed above their near-term downtrend lines.
Also, the Dow Jones Transports closed above its 50-day moving average.
As such, every index is now in a neutral sideways trend except the Nasdaq 100, which is negative.
Cumulative breadth finally improved as well with the A/Ds for the All Exchange, NYSE and Nasdaq turning neutral from negative.
What's more, every index generated a bullish stochastic crossover signal with the exception of the Dow Transports, which did so in mid-April.
Sentiment Indicators Prove Out on Strong Rally
The McClellan 1-Day OB/OS oscillators remain neutral despite Wednesday's strength (All Exchange: +22.28 NYSE: +23.13 Nasdaq: +22.85).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) lifted to 47%, also staying neutral.
The Open Insider Buy/Sell Ratio dipped to 92.04, remaining neutral post their recent active buying activity.
What we believe may be the most important data factor for the near-term is the detrended Rydex Ratio (contrarian indicator; see below), which remains very bullish at -2.41. While dipping slightly, it still finds this contrarian indicator with the leveraged ETF traders highly leveraged short. We repeat, the insider/Rydex dynamic at these levels has frequently resulted in powerful market rallies like the one achieved Wednesday.
The detrended Rydex Ratio is -2.41 (very bullish)
Meanwhile, this week's AAII Bear/Bull Ratio (contrarian indicator) rose further to a very bullish 2.97 and at a 20-year peak matched only by the 2008-2009 financial crisis. Crowd fear is at very extreme levels.
Also, the Investors Intelligence Bear/Bull Ratio (contrary indicator) is on a bullish signal at 32.9/34.2.
S&P 500 Valuation and Treasury Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 slipped to $235.9 per share. Thus, the S&P's forward P/E multiple is 18.2x with the "rule of 20" finding ballpark fair value at 17.1x.
The S&P's forward earnings yield is now 5.48%.
The 10-Year Treasury yield closed lower at 2.92% despite the Fed's rate hike Wednesday. We view support as 2.5% and resistance at 3.0%.
Here's Our Near-Term Market Outlook
While some backing and filling of Wednesday's moves is likely, we now have a greater degree of confidence that the recent correction has likely been exhausted. Our suggestion of doing some nibbling in stocks two days ago remains intact with the caveat that it would be best to buy on weakness.
