Time for a breakout?
While no violations of resistance or trend were established on Friday's runup, some encouraging patterns are appearing on the Nasdaq Composite and Nasdaq 100 (see below).
Meanwhile, the Rydex Ratio turning very positive as the leveraged ETF traders bet more heavily against recent market strength. Also valuation via the "rule of 20" continues to suggest the market is trading at a discount to forward 12-month earnings for the S&P 500.
What's Happening on the Charts
All the major equity indexes closed higher Friday and near their highs of the session with positive internals on the NYSE and Nasdaq. Despite the strength, however, none were able to violate resistance, leaving all in their near-term neutral trends.
We would note that the Nasdaq Composite (see above) and Nasdaq 100 appear to be forming "ascending triangle" patterns that suggest demand has been increasing on each decline and, should resistance be violated, a continuation of strength would be likely.
Market breadth turned back to neutral from negative for the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq.
All stochastic signals are neutral.
Sentiment Still Key Indicator
The McClellan OB/OS Oscillators remain neutral (All Exchange: +20.47 NYSE: +19.97 Nasdaq: +21.68).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) turned neutral, rising to 26%.
The Open Insider Buy/Sell Ratio rose to 61.4, also staying neutral.
The detrended Rydex Ratio (contrarian indicator) dropped to -2.33 and is very bullish as the leveraged ETF traders extended their leveraged short exposure.
Last week's AAII Bear/Bull Ratio (contrarian indicator) saw the crowd staying very fearful, at 2.63 and very bullish.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a drop in bulls and is very bullish at 40.3/30.5. Three times in the past decade, such readings have marked market lows, most followed by notable rallies.
Market Trading at a Discount
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped to $238.63 per share. As such, the S&P's forward P/E multiple is 16.2x and at a discount to the "rule of 20" ballpark fair value at 17.1x.
The S&P's forward earnings yield is 6.18%.
The 10-Year Treasury yield closed lower at 2.96%. We view support as 2.8% and resistance at 3.15%.
Our Near-Term Market Outlook
We are getting more encouraged regarding near-term market prospects. Very intense investor fear combined with more appealing valuation as breadth improves while the Nasdaq Composite and Nasdaq 100 are seeing increasing demand on each subsequent decline, suggesting potential for a breakout on their part, imply the scales are weighted for more progress over the near-term.