This is not a time to become complacent.
While the major stock indices continue to press higher, the compression of the previous valuation gap combined with investment advisors complacency and the low VIX suggest some degree of caution is warranted.
On the Charts
The indices closed mostly higher Thursday with the exceptions of the Nasdaq Composite and Value Line Arithmetic index posting losses.
The S&P 500 (see below) and DJIA made new closing highs although the gains were minimal.
Internals were mixed with the NYSE seeing positive breadth but negative up/down volumes while the Nasdaq saw the opposite.
We continue to find the near-term trends split with the S&P 500, DJIA, Nasdaq Composite and Nasdaq 100 positive while the rest have slipped into neutral.
Source: Worden
The indices in uptrends remain overbought on their stochastic levels with the others having generated "bearish stochastic crossover" signals over the past week.
The VIX is down at levels seen three times over the past 12 months that were followed by spikes in volatility and market corrections. That remains a concern for us.
Data
The data remains generally neutral. All of the one-day McClellan Overbought/Oversold Oscillators are neutral (All Exchange:-19.66 NYSE:-23.7 NASDAQ:-16.88).
The detrended Rydex Ratio (contrary indicator) is neutral at +0.59 while this week's AAII Bear/Bull Ratio (contrary indicators) remains neutral at 26.33/36.33.
The Investor's Intelligence Bear/Bull Ratio (contrary indicator), however, continues to be bearish at 17.8/54.2, suggesting an excess of bullish sentiment/complacency on the part of investment advisors.
The percentage of S&P 500 stocks trading above their 50-day moving averages is a neutral 66.1%.
The Open Insider Buy/Sell Ratio has returned to a less cautionary level at 33.8.
Valuation
Valuation remains essentially at fair value with forward 12-month earnings estimates for the S&P 500 dipping to $172.13 per share via Bloomberg, leaving the forward P/E multiple at 18.0x while the "rule of twenty" finds fair value at 18.2x.
The 10-year Treasury yield is 1.82%, while the earnings yield 5.56%.
Our Outlook
While we are keeping our near term "neutral" outlook for the major equity indices in place, the compression of the previous valuation gap combined with investment advisors complacency and the low VIX suggest some degree of caution is warranted.
At the time of publication, Ortmann had no positions in any securities mentioned.