We believe the overall environment for equities has improved notably after the correction lows and near-term bullish trends should be respected.
The only cloud we see hanging over the markets currently are the McClellan 1-day OB/OS Oscillators that remain overbought and continue to imply some pause/consolidation of recent gains as has been experienced in the S&P 500 and DJIA over the past six sessions.
Checking on the Charts
The major equity indexes closed mixed Friday with mostly positive internals. All closed at or near their intraday highs with only the S&P 500 (see above), Nasdaq Composite and Nasdaq 100 closing in the red as the rest posted gains.
All indexes continue to be in near-term bullish trends while market cumulative breadth remains healthy for the All Exchange, NYSE and Nasdaq.
Stochastic levels are overbought on all the charts but currently lack bearish crossover signals.
Digging Into the Data
The McClellan OB/OS Oscillators are still in overbought territory (All Exchange: +71.16 NYSE: +65.7 Nasdaq: +75.08). They continue to suggest the potential for a pause/consolidation of recent market gains.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) remains neutral, lifting slightly to 72%.
The Open Insider Buy/Sell Ratio also rose fractionally to 41.7, also staying neutral.
We reiterate the detrended Rydex Ratio (contrarian indicator) should be noted as it has risen to a neutral -0.33. While not negative, we believe it suggests the leveraged ETF traders have done a significant amount of covering of their prior extremely leveraged short exposure. As such, its contrarian and bullish influence has dissipated.
Last week's AAII Bear/Bull Ratio (contrarian indicator) finds the crowd a bit less fearful, lifting to 1.53, yet remains on a very bullish signal.
However, the Investors Intelligence Bear/Bull Ratio (contrary indicator) moderated and stayed neutral with the number of bears dropping and bulls increasing at 33.3/38.9.
S&P 500 Valuation and Yields
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped to $234.13 per share. As such, the S&P's forward P/E multiple is 17.7x and at a slight premium to the "rule of 20" ballpark fair value at 17.2x.
The S&P's forward earnings yield is 5.65%.
The 10-Year Treasury yield closed higher at 2.84% and above resistance. We now view support as 2.72% and new resistance at 2.91%.
Our Market Outlook
We remain of the opinion that the major equity indexes are on the road to recovery from the declines since the beginning of the year given improvements in trend and breadth. The only outlier, in our opinion, are the dampening implications from the McClellan 1-day OB/OS Oscillators that suggest better buy spots may be available over the near term.