Excess Bullish 'Crowd' Sentiment Raises a Big Caution Flag
While two of the major equity indexes made new closing highs Tuesday, another broke below support, shifting its near-term trend to bearish, leaving the index trends, in general, on mixed signals.
And as cumulative market breadth has been eroding lately, the excess of bullish “crowd” sentiment combined with what we see as overvaluation of the S&p 500 suggests we should stay cautious on the market’s prospects over the near term.
Let's take a deep dive now.
Index Trends & Breadth Remain Mixed
On the charts, the major equity indexes closed mixed Tuesday with gains on the S&P 500 (see above), Nasdaq Composite and Nasdaq 100 as the rest declined.
Market internals were mostly negative as well.
While the Nasdaq indexes made new closing highs, in contrast, the DJIA closed below support and its 50-day moving average (see below), joining the Dow Jones Transports with its trend turning bearish.
Only the Nasdaq indexes are still in bullish near-term trends with the rest neutral.
Cumulative market breadth remains bearish on the Nasdaq suggesting its gains have been very selective regarding participants while the NYSE and All Exchange advance/declines lines remain neutral.
No stochastic signals of import were generated.
Investor Sentiment Cautions
Most of the data are neutral except for sentiment.
The 1-Day McClellan Overbought/Oversold Oscillators are neutral on the All Exchange and Nasdaq as the NYSE’s is now mildly oversold (All Exchange: -32.87 NYSE: -56.36 Nasdaq: -22.22).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 43% from 50% and is neutral.
Also of note, the detrended Rydex Ratio (contrarian indicator) remains on its warning signal as the typically wrong leveraged ETF traders increased their leveraged long exposure to 1.26.
The detrended Rydex Ratio is 1.26% (bearish)
This week’s AAII Bear/Bull Ratio (contrarian indicator) is unchanged at 0.66 and is neutral.
Yet the Investors Intelligence Bear/Bull Ratio (contrary indicator) is bearish at 17.7/56.5 as bulls outweigh bears.
The Open Insider Buy/Sell Ratio is neutral as it rose slightly to 36.9.
Leveraged ETF sentiment is -0.6, remaining neutral.
Valuation Well Above 'Rule of 20'
Regarding valuation, the 12-month consensus earnings estimate for the S&P 500 from Bloomberg rose further to $252.90 per share. Yet, its forward P/E multiple at 21.0x remains well above the “rule of 20” ballpark fair value of 15.5x. We reiterate that a 600-basis point premium remains a significant cause for concern.
The S&P's earnings yield is 4.77%.
Of note, the 10-Year Treasury yield rose to 4.54% and above resistance. Its trend is bullish with support at 4.45% and resistance at 4.57%.
The U.S. dollar, via the (UUP) ETF, closed lower at $28.62 and is neutral. Support is $28.49 and $29.08 is resistance.
Bottom Line
There is still enough evidence, as noted above, to exercise some caution in viewing the equity markets. Its selectivity implies sell signals on individual names should be honored while buying should be very discerning.