The warning signals we discussed here Friday appear to have been on target as all the major equity indexes closed near their lows of the session. However, from a technical viewpoint, there were no violations of support or trend leaving all still in near-term uptrends and above their 50-day moving averages.
On the data side, it remains largely neutral, but valuation remains disconcerting, in our opinion, as forward 12-month consensus earnings estimates for the S&P 500 continue to erode, leaving its forward 12-month P/E at a significant premium.
We believe the potential for some further weakness exists, thus implying buying should be shelved for the near term until the data and charts suggest otherwise.
Indexes Close Lower After Warning Signals
Chart Source: Worden
On the charts, all the major equity indexes closed lower Friday with negative internals on lighter volume.
All closed near their lows for the day but there were no violations of support or the current uptrends as all remain short-term bullish. Yet we would note several are extended well above their 50-day moving averages.
Despite the declines, the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq remain positive and above their 50 DMAs as well.
On the stochastic front, the DJIA generated a bearish stochastic crossover signal as the rest remain overbought.
McClellan OB/OS Turn Mostly Neutral
The data dashboard is almost entirely neutral except for the Nasdaq 1-Day McClellan Overbought/Oversold Oscillator that is mildly bearish (All Exchange: +46.51 NYSE: +41.39 Nasdaq: +52.18). Their overbought conditions at Friday's open appear to have been prescient once again.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 69% and remains on a neutral signal.
The Open Insider Buy/Sell Ratio slipped to 37.9 and is neutral as well.
The detrended Rydex Ratio (contrarian indicator) rose to +0.18 as they were buyers of the weakness, in contrast to the insiders, and is also neutral.
Last week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.32 as bearish sentiment declined but remains bullish.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) was neutral at 28.2/45.1 as bears and bulls both declined.
Valuation Remains Stretched
We continue to see valuation as the most threatening issue. The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 continue to slide, dropping to $217.81 per share. As such, its forward P/E multiple is 19.0x and at a significant premium to the "rule of 20" ballpark fair value of 16.5x. It remains a cause for concern in our view.
The S&P's forward earnings yield is 5.27%.
The 10-Year Treasury yield closed higher at 3.53%. It is in a short-term negative trend with support at 3.4% and resistance at 3.67%.
Market Outlook
We see valuation as a potential stumbling block for near-term market progress as, in our opinion, risk/reward has become somewhat unfavorable. We are on the sidelines for now as to new purchases.
