As we begin a pivotal week of earnings, economic data and Fed policy, where do the markets stand?
Three technical chart improvements were registered Friday, leaving all but one index in their near-term uptrends as market cumulative breadth remains healthy. Indeed, sell signals have yet to appear from a chart perspective.
However, while the bulk of the data is neutral, the McClellan 1-day OB/OS Oscillators remain overbought while the S&P 500's valuation has stretched to a point that we believe suggests a bit of air is in the balloon.
Market Rally Continues and Lacks Sell Signals
Chart Source: Worden
The major equity indexes continued their recent rally progress Friday with positive NYSE and Nasdaq internals as all closed near their intraday highs on higher trading volumes.
All closed near their highs of the day with the Nasdaq 100 (see above) closing above resistance, the Dow Jones Transports closing back above its near-term uptrend line and turning positive while the Nasdaq Composite closed above its 200-day moving average.
All the short-term trends remain bullish except the DJIA, which is still neutral.
Cumulative market breath remains strong with the advance/decline lines for the All Exchange, NYSE and Nasdaq staying bullish and above their 50 DMAs.
Stochastic levels are overbought but have not generated bearish crossover signals thus far.
McClellan OB/OS Suggests Caution
The data dashboard is mostly neutral. However, the 1-day McClellan Overbought/Oversold Oscillators remain in overbought territory and, in our view, continue to suggest a bit of caution (All Exchange: +62.62 NYSE: +80.62 Nasdaq: +55.42).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) was unchanged at 72% and is on a neutral signal.
The Open Insider Buy/Sell Ratio lifted to 31.8 and is neutral as well.
The detrended Rydex Ratio (contrarian indicator) dropped to -0.63 and is also neutral.
Last week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.52 as bearish sentiment declined and has dipped to bullish versus its prior very bullish signal.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) was neutral at 29.6/46.5 as bears declined and bulls rose.
S&P Valuation Stretched
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 continued to slip further to $223.57 per share. As such, its forward P/E rose to 18.2x and at a higher premium to the "rule of 20" ballpark fair value of 16.5x. We regard it as somewhat stretched.
The S&P's forward earnings yield is 5.49%.
The 10-Year Treasury yield closed higher at 3.52%. It is in a short-term negative trend with support at 3.4% and resistance at 3.67%.
Our Market Outlook
While the charts and breadth remain healthy and should, in our opinion, be respected, the OB/OS levels and valuation spread continue to suggest some caution and selective buying near support levels when available, versus simply chasing price.
