Something important happened during Thursday's market gains. Baby steps...
All but two of the major equity index charts managed to close above their near-term downtrend lines, flipping from bearish to neutral, and offering a bit of encouragement.
However, cumulative market breadth remains largely negative. And the data finds the McClellan OB/OS Oscillators moderating with only one staying oversold. On the plus side, forward 12-month consensus earnings estimates for the S&P 500 finally saw an uptick.
Still, in our opinion, all of this is being counterbalanced by the rise in the 10-Year Treasury yield, while corporate insiders continue to sell. As such, while we are slightly encouraged by the chart action, we believe more positive evidence is required before becoming more sanguine in our outlook.
Most Index Charts Flip to Neutral from Bearish
Chart Source: Worden
On the charts, the major equity indexes closed higher Thursday with positive internals and near their intraday highs.
Of technical importance is the fact that the S&P 500, DJIA, Nasdaq Composite, Nasdaq 100 (see above), Dow Jones Transports and Value Line Arithmetic Index all closed above their near-term downtrend lines and are now neutral versus their prior bearish trends.
The MidCap 400 and Russell 2000 remain negative.
However, cumulative market breadth remains negative for the All Exchange and Nasdaq while the NYSE's is neutral.
The stochastics saw the Value Line index flash a bullish crossover signal.
Insiders Keep Selling
On the data dashboard, the 1-Day McClellan Overbought/Oversold Oscillators tempered with only the NYSE staying oversold (All Exchange: -50.05 NYSE: -58.06 Nasdaq: -45.25).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 44% and remains neutral.
The Open Insider Buy/Sell Ratio continues to be a concern as it dipped slightly to 20.0. It remains cautionary as corporate insiders, who have been very active sellers, have yet to show any important sign of buying interest.
The detrended Rydex Ratio (contrarian indicator) rose to 0.00 and is neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 0.99 as bearish sentiment increased but remains neutral.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 59.9.
Forward S&P Estimates Lift
Valuation remains problematic.
While the forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 rose to $220.88 per share, its P/E multiple of 18.0x continues to be a problem as it remains at a significant premium to the "rule of 20" ballpark fair value that slipped to 15.9x, due to the rise in the 10-Year yield. Valuation, in our opinion, continues to leave little margin for error for equities.
The S&P's forward earnings yield is 5.55%.
The 10-Year Treasury yield closed higher at 4.07% and above resistance. It is in a short-term uptrend with support at 3.90% and new resistance at 4.13%, by our analysis.
Our Market Outlook
While Thursday's chart action offered a sigh of relief, given the market's extended valuation, generally negative breadth and insiders showing a lack of buying interest despite the reduction in their stock prices, we suggest more encouraging evidence is necessary before assuming the recent correction has been completed. Some caution remains appropriate, in our view.
