Are we now in a new bull market? That's a question on many minds this morning, including Real Money's own Helene Meisler, James 'Rev Shark' DePorre, Stephen 'Sarge' Guilfoyle and Doug Kass, among others.
The major equity indexes closed mixed Thursday with mixed NYSE internals as the Nasdaq's were positive. Trading volumes for both were about 1 billion shares lower than the prior down session, possibly indicating a lessening of demand.
No technical events of note were generated, leaving all but one index in their near-term bullish trends as is market cumulative breadth.
However, in our opinion, the data and valuation appear to be suggesting the possibility of some degree of consolidation or correction is increasing for the reasons discussed below.
While there is no time frame for an inflection point, we believe a more defensive approach to the markets is now more appropriate while sell signals should be honored.
Indexes Close Mixed With Trends Unchanged
Chart Source: Worden
On the charts, the major equity indexes closed mixed Thursday with positive Nasdaq internals while the NYSE saw negative breadth but positive up/down volume.
Volumes were about one billion shares lower on each exchange in the bounce from prior weakness. While it's too early to draw conclusions, the drop in volume could suggest a lessening of demand.
The S&P 500 (see above), DJIA, Nasdaq Composite and Nasdaq 100 posited gains as the rest declined.
Yet there were no technical events of import generated, leaving all but the DJIA in near-term bullish trends as are the cumulative advance/decline lines for the All Exchange, NSYE and Nasdaq.
On a cautionary note, all the indexes are now overbought on their respective stochastic readings. Said conditions can exist for extended periods. They have yet to generate bearish crossover signals but should be monitored closely.
Also, the VIX remains at a three-year low and at levels frequently resulting in higher volatility/market weakness.
Data Suggest Potential for Correction Increasing
The data dashboard continues to send some cautionary signals. The 1-day McClellan Overbought/Oversold Oscillators are all in overbought territory (All Exchange: +61.63 NYSE: +70.31 Nasdaq: +56.57). While not at extreme levels, they do imply some caution is advisable.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, dipping to 56%.
However, the Open Insider Buy/Sell Ratio continued to decline to 40.1 from 47.1 as insiders have been quietly but steadily decreasing their buying activity of late, as selling increased, adding to the caution signals.
The Open Insider buy/sell ratio is 40.1 (neutral)
The detrended Rydex Ratio (contrarian indicator) dropped to +0.46, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) slipped to 1.46 and is now bullish versus its prior very bullish implications. In our view, it is still encouraging, but less so.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 23.3/47.9%.
Valuation Concerns Persist
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose slightly to $223.07 per share. Our concern persists as the valuation gap is quite wide and still disconcerting with the S&P's forward P/E multiple at 19.3x versus the "rule of 20" ballpark fair value of 16.3x, suggesting valuation is quite extended.
The S&P's forward earnings yield is 5.19%.
The 10-Year Treasury yield closed lower at 3.71%. It is short-term neutral with support at 3.56% and resistance at 3.81%.
Bottom Line
While the charts and breadth look fine, we are seeing a number of underlying issues that suggest some degree of market risk is rising. Thus, our defensive outlook for now remains intact.
