As another earnings season begins Friday with many of the major banks reporting, where does the market stand?
The recent rally continued Thursday with all the major equity indexes closing near their intraday highs. All but two of the indexes managed to close above their resistance levels, leaving all the charts near-term bullish as is cumulative market breadth.
However, while the charts ascend and lack sell signals, the data is flashing some red warning lights that, in our opinion, increase the near-term probability of some weakness and consolidation if the recent sizable market gains.
So, while sell signals have yet to appear on the charts, we remain of the opinion, as we said here Thursday, that some caution is warranted. The data suggests not chasing price at these levels while waiting for better buying opportunities.
More Resistance Are Violated
Chart Source: Worden
On the charts, all the major equity indexes closed higher Thursday with positive internals on higher volume on the NYSE and Nasdaq.
All closed near their intraday highs as the DJIA (see above), Nasdaq Composite, Dow Jones Transports, MidCap 400, Russell 2000 and Value Line Arithmetic Index closed above their respective resistance levels.
That left all the index charts in near-term bullish trends and above their 50-day moving averages.
Cumulative market breadth continued to strengthen on the All Exchange, NYSE and Nasdaq as well with all bullish and above their 50 DMAs.
However, the stochastic levels are now quite overbought and in the nineties across the board. While they have not yielded bearish crossover signals yet, they imply a degree of elevated risk is present.
Data Flashing Red Cautionary Signals Implying Near-Term Weakness
On the data front, the cautionary signals are getting stronger.
The McClellan Overbought/Oversold Oscillators moved deeper into very overbought territory (All Exchange: +136.41 NYSE: +150.16 Nasdaq: +127.26). They suggest some consolidation is becoming more likely in the near term.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) is unchanged at 75.0%, staying neutral but just shy of turning bearish.
The Open Insider Buy/Sell Ratio remains neutral at 26.9 but just shy of turning bearish as insiders notably pulled back from their buying at the start of the rally.
The detrended Rydex Ratio (contrarian indicator) rose to -1.35 from -1.82 as the leveraged ETF traders increased their short-covering. It remains on a bullish signal and a potential upside catalyst but lessening in strength.
This week's AAII Bear/Bull Ratio (contrarian indicator) moved higher to 2.11 as bearish sentiment increased and on a very bullish signal.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is bullish at 33.81/36.6 as the number of bears rose and bulls declined.
Market Valuation Remains at a Premium
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose to $227.27 per share. As such, its forward P/E multiple is 17.5x and remains at a premium to the "rule of 20" ballpark fair value of 16.6x.
The S&P forward earnings yield is 5.71%.
The 10-Year Treasury yield closed lower at 3.45% and below support. It is in a short-term negative trend with new support at 3.41% and resistance at 3.67%.
Our Market Outlook
While the charts have yet to send sell signals, the data have intensified warning signals to a level suggesting chasing price as inappropriate. We would be buyers on weakness near support, however.
