Markets are finally starting to see a broadening out of the names seeing upside amid a rotation to smaller-cap stocks.
All the major equity indexes closed near their intraday highs Tuesday with three of the index charts closing above resistance. As such, all but two are now in short-term bullish trends while cumulative market breadth has improved across the board with all now in near-term bullish trends.
However, while the charts and breadth are on green lights, there are some cautionary signals beginning to appear that are suggesting near-term mark risk is elevating.
All the McClellan OB/OS Oscillators are overbought while insiders have notably backed off from their recent buying activity. Possibly of greatest importance, however, is the VIX is at a three-year low and at a level frequently followed by increased volatility.
Adding into the mix the S&P 500's forward valuation at a significant premium to fair value, and the weight of the evidence implies the potential for a market correction is rising.
Indexes Advance as Some Caution Signs Appear
Chart Source: Bloomberg
On the charts, all the major equity indexes closed higher Tuesday with strong internals on heavier trading volume.
All closed near their intraday highs with the Midcap 400, Russell 2000 (see above) and Value Line Arithmetic Index closed above resistance that left all the charts in near-term bullish trends except for the DJIA and Dow Jones Transports, which remain neutral.
There was improvement in market cumulative breadth as well with the advance/decline lines for the All Exchange, NYSE and Nasdaq bullish and above their 50-day moving averages.
However, all but the Dow Transports are now overbought on their stochastic readings. No bearish crossover signals have appeared thus far but should be monitored closely.
McClellan OB/OS Oscillators Overbought with VIX at 3-Year Low
The data dashboard is starting to raise a few yellow flags.
The 1-day McClellan Overbought/Oversold Oscillators are all back in overbought territory (All Exchange: +65.09 NYSE: +72.14 Nasdaq: +61.66) and suggesting some caution.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, lifting to 51%.
However, the Open Insider Buy/Sell Ratio declined to 54.7 from 64.3 as insiders have been steadily decreasing their buying activity of late. It remains neutral.
The detrended Rydex Ratio (contrarian indicator) dipped to +0.30, also staying neutral.
This week's AAII Bear/Bull Ratio (contrarian indicator) slipped to 1.1.46 and is now bullish versus its prior very bullish implications. In our view, it is still encouraging, but less so.
The AAII Bear/Bull Ratio (using 3WMA) is 1.46 (bullish)
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 23.3/47.9%.
Valuation Gap Remains Disconcerting
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 rose to $223.21 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 19.2x versus the "rule of 20" ballpark fair value of 16.3x, suggesting valuation is quite extended.
The S&P's forward earnings yield is 5.21%.
The 10-Year Treasury yield closed higher at 3.7%. It is short-term neutral with support at 3.56% and resistance at 3.81%.
Bottom Line
While the charts look great, the recent rally has raised some caution flags, as discussed above, that suggest the probabilities for some retracement of gains is increasing. Thus, some caution is appropriate.
