While Thursday's market action had a generally positive tone, did it really change anything?
Most of the major equity indexes closed near their session highs resulting in a number of positive technical events on the charts. However, only one index managed to improve its near-term trend, leaving the trends mixed. Cumulative market breadth also saw some improvement.
On the data front, it remains largely neutral except for one key bearish signal, while the S&P 500 continues to be extended on a valuation basis.
Despite some positives, they are not enough to alter our view that we are not out of the woods regarding the current market correction/consolidation phase. The persistent rise in the 10-Year Treasury yield and strength of the U.S. dollar add to our concerns.
Charts and Breadth See Some Improvement
Chart Source: Worden
On the charts, the major equity indexes closed higher Thursday with positive internals as all closed near their session highs.
Positive technical events were generated with the S&P 500 (see above), DJIA and Midcap 400 closing above resistance.
Additionally, the DJIA closed above its downtrend line, turning neutral, while it and the Nasdaq Composite closed above their 50-day moving averages.
As such, only the Nasdaq Composite's trend is near-term bullish, the Dow Jones Transports and MidCap 400 bearish, and the rest neutral.
Cumulative market breadth also improved as the All Exchange advance/decline line shifted to neutral from bearish, the NYSE moved to bullish from neutral while the Nasdaq remains bearish.
Bullish stochastic crossover signals were generated on the MidCap 400, Russell 2000 and Value Line Arithmetic Index.
Neutral With One Exception
The McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: +8.5 NYSE: +17.13 and Nasdaq: +2.43).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 39%, staying neutral.
The Open Insider Buy/Sell Ratio rose to 52.1%, staying neutral as well.
However, the detrended Rydex Ratio (contrarian indicator) is still bearish versus its previous neutral status and unchanged at 1.04% as the leveraged ETF traders continue to "buy the dip." We view it as another cautionary signal.
Leveraged ETF sentiment (contrarian indicator) is 20.3% and neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) dipped to 0.93, also staying neutral.
The new Investors Intelligence Bear/Bull Ratio (contrary indicator) remains neutral at 48.3%.
Valuation Leaves Little Room for Error
Valuation, remains a primary concern and extended, in our opinion. The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose slightly to $232.55 per share with its forward P/E multiple at 19.4x and still well above the "rule of 20" ballpark fair value at 15.7x. It continues to leave little room for error.
The S&P's forward earnings yield dropped to 5.16%.
The 10-Year Treasury yield closed higher at 4.29%. Support is 4.12% with resistance at 4.32%.
Bottom Line
While the charts and breadth have improved, overvaluation and the Rydex level continue to be cautionary for the near term. We continue to honor sell signals and judge names on a case-by-case basis.
