3 Key Warning Signs That Market Risk Is High
Our concerns regarding the market’s near-term prospects persist.
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As markets continue with record closes, things might not be as rosy as they seem.
All the major equity indexes closed higher Tuesday with positive NYSE and Nasdaq internals as trading volumes declined from the prior session. All closed near their intraday highs with three of the indexes posting new closing highs.
However, our concerns regarding the market’s near-term prospects persist. Cumulative market breadth is currently neutral but has been negative for some time as fewer and fewer stocks have been participating in rallies, suggesting a weakening internal structure.
Also, investor sentiment data (contrarian indicators) is mostly cautionary as an excess of bullish sentiment from the crowd has yet to be dampened. Finally, the forward valuation of the S&P 500 remains over 600 basis points above ballpark fair value.
These three important factors continue to imply current market risk is high.
More New Closing Highs on Lighter Volume
On the charts, all the major equity indexes closed higher Tuesday with positive NYSE and Nasdaq internals.
All closed near their intraday highs with the S&P 500, Nasdaq Composite (see below) and Nasdaq 100 posting new closing highs as the Nasdaq Composite and Nasdaq 100 closed above resistance.
However, the session had no impact on the current near-term trends for the indexes. Trends remain bullish for the S&P 500, DJIA, Nasdaq Composite and Nasdaq 100 while the MidCap 400 is bearish and the Dow Jones Transports and Russell 2000 are neutral.
Cumulative market breadth is currently neutral for the All Exchange NYSE and Nasdaq. Yet we would note said breadth has been notably deteriorating over the past several weeks that suggests an unstable base for equities. In fact, the unweighted S&P chart has been making lower highs since April.
No new stochastic signals were generated.
Investor Sentiment Continues to Caution
The data remain mixed.
The 1-Day McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: -1.17 NYSE: +3.36 Nasdaq: -2.62).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 44% staying neutral.
Of note, the detrended Rydex Ratio (contrarian indicator) remains bearish at 1.03.
Thus, two of the three sentiment indicators are still cautionary with this week’s AAII Bear/Bull Ratio (contrarian indicator) unchanged at a neutral 0.69, as the Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 17.6/60.3 as bulls continue outweighed bears by a wide margin.
The Open Insider Buy/Sell Ratio remains neutral at 41.5.
Leveraged ETF sentiment is 5.1 remaining neutral.
S&P Multiple Rises
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg is unchanged at $253.30 per share, lifting its forward P/E multiple to 21.7x and well above the “rule of 20” ballpark fair value at 15.5x. It remains an important concern for us as a 600-basis point premium is significant.
The S&P's earnings yield is 4.6%.
The 10-Year Treasury yield dipped to 4.44%. Support is 4.28% and resistance is at 4.51%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed lower at $29.10. Its trend remains bullish. Support is $28.89 and $29.23 is resistance.
Bottom Line
We continue to honor sell signals on individual names while being very selective on the buy side and occasionally shorting names with “nosebleed” multiples and charts that are rolling over.