The weaker-than-expected CPI numbers Tuesday morning appear to be a catalyst for the market.
Tuesday's gains left all the index near-term trends neutral while cumulative market breadth saw some improvement. The data remain generally neutral except for investor sentiment (contrarian indicator), which finds the crowd at higher levels of fear and thus lending a positive tone.
But what may be most important is the fact that most of the index charts registered bullish stochastic crossover signals at the close. As we have noted, this is the opposite of the stochastic implications prior to the recent consolidation. As such, we believe it tilts the scale slightly in favor of the bulls.
We see no evidence presented at this time to alter out buying weakness near support as the best approach to equities.
Up Session Leaves All Chart Trends Neutral
Chart Source: Worden
On the charts, all the major equity indexes closed higher Monday with positive market internals on higher volume.
All closed near their intraday highs, but none managed to violate resistance, leaving all the near-term trends neutral at the close.
Yet there was some improvement in cumulative breadth as the advance/decline lines for the All Exchange, NYSE and Nasdaq turned neutral from negative.
We would focus our attention on the stochastic levels that saw bullish crossover signals on the S&P 500 (see above), DJIA, Nasdaq Composite, Nasdaq 100 and Dow Jones Transports. As previously discussed, the bearish crossover signals prior to recent consolidation were prescient. Thus, the new signals tend to tilt the scale to more positive near-term action.
On the Data Front...
The McClellan Overbought/Oversold Oscillators remain neutral (All Exchange: -17.32 NYSE: -24.27 Nasdaq: -12.10).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) moved higher to 81%, turning mildly bearish.
The Open Insider Buy/Sell Ratio rose again to 61.6% as insiders did a little buying, staying neutral.
The detrended Rydex Ratio (contrarian indicator) was unchanged at -0.95 and is mildly bullish.
This week's AAII Bear/Bull Ratio (contrarian indicator) moved higher to 1.57 as bearish sentiment increased and remains on a bullish signal.
The AAII Bear/Bull Ratio is 1.57 (very bullish)
The Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a rise in bears and bulls, staying neutral at 32.9/43.8.
Valuation Gap Widens
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 continued to slide down to $224.66 per share. As such, its forward P/E multiple stands at 17.8x and remains at a premium to the "rule of 20" ballpark fair value of 16.4x as the gap widened.
The S&P's forward earnings yield slipped to 5.63%.
The 10-Year Treasury yield closed higher at 3.61%. It is in a neutral trend with support at 3.29% and resistance at 3.69%, by our analysis.
Near-Term Market Outlook
The only significant fly in the ointment currently is the valuation gap, in our view, while the charts and data continue to suggest that buying weakness near support is appropriate until evidence appears to suggest an alteration.