Change in Character... Change in Leadership?
Thursday's trading action suggests a potential change in market leadership. Here's what to watch.
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The major equity indexes saw a significant change in character Thursday as the previous mega-cap leaders took it on the chin while small and mid-cap names saw notable gains. However, the drop in the mega-caps occurred with positive breadth and higher volume versus the prior session on the NYSE and Nasdaq. This is also a notable change in character from when the indexes were rising on negative breadth.
The action, in our opinion, suggests a potential change in market leadership. Additionally, the three indexes that were previously in bearish trends have turned neutral, leaving the S&P 500, DJIA, Nasdaq Composite and Nasdaq 100 still in uptrends despite their declines. Cumulative market breadth saw a notable improvement and lessened its prior warning.
Some concerns remain, however. Investor sentiment is still excessively bullish while the forward valuation of the S&P 500 remains very extended.
Mega-Caps Fade as SMIDS Advance
On the charts, the major equity indexes closed mixed Thursday with gains on the DJIA, Dow Jones Transports, Midcap 400 and Russell 2000 (see above) as the S&P, Nasdaq Composite and Nasdaq 100 dropped.
Of technical note, the Dow Transports, MidCap 400 and Russell closed above resistance as well as their near-term downtrend lines, turning neutral from bearish with the rest still in uptrends.
We would draw attention to the improvement in cumulative market breadth that had previously been disturbing. Said breadth has turned from bearish within market advances to bullish for the All Exchange, NYSE and Nasdaq.as breadth has expanded, offering a better underlying structure.
No stochastic signals of import were generated.
Data Are a Mixed Bag
The 1-Day McClellan Overbought/Oversold Oscillators are now overbought and implying a pause (All Exchange: +74.04 NYSE: +78.8 Nasdaq: +71.79).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 62%, staying neutral.
Of note, the detrended Rydex Ratio (contrarian indicator) remains bearish at 1.16 with the leveraged ETF traders leveraged long again. Thus, two of the three sentiment indicators are bearish with this week’s AAII Bear/Bull Ratio (contrarian indicator) dropping to 0.59 and neutral, while the Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 16.9/63.1 as bulls continued to outweigh bears by a wide margin.
The Open Insider Buy/Sell Ratio moved to neutral from bearish at 30.7.
Leveraged ETF sentiment is 25.4 remaining neutral.
Valuation Remains a Concern
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dropped further to $252.56 per share, leaving its forward P/E multiple at 22.1x and well above the “rule of 20” ballpark fair value at 15.8. This 630-basis point premium is significant.
The S&P's earnings yield dipped to 4.42%.
The 10-Year Treasury yield slipped to 4.19% and below support. New support is 4.16% and resistance is at 4.29%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed lower at $28.79 and also below support. Its trend is neutral with new support at $28.69 and resistance at $28.94.
Bottom Line
While we are doing some very selective buying, some caution remains appropriate. We continue to honor sell signals on individual names.