Expect Some Chop Ahead
Despite the major stock indexes closing higher, we see some sideways action in the windshield.
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The major equity indexes closed mostly higher Tuesday with positive New York Stock Exchange and Nasdaq internals. Both saw trading volumes increase from the prior session.
But despite the green on the screen, we can expect some sideways chop going forward.
The S&P 500 and Dow Jones industrial average posted new closing highs and the Transports closed above resistance.
Charts and Technicals
The technical picture is little changed with all but one index in near term uptrends, while cumulative market breadth is a bit mixed.
On the data dashboard, most of the indicators are neutral, but one is close to a prescient bearish signal. Meanwhile forward valuation of the S&P 500, based on Bloomberg’s forward one-month earnings estimates that slipped further, remains very extended above ballpark fair value.
The picture is a bit cloudy, but we see sideways action and consolidation as more probable. We remain buyers on weakness of names that fit our technical/fundamental requirements.
On the charts, we see most closing near their session highs with near-term trends unchanged -- all are bullish except for the Russell 2000, which is neutral.
At the same time, cumulative market breadth is still bullish for the All Exchange and New York Stock Exchange as well. Nasdaq’s advance/decline line recently slipped to neutral from bullish.
As has been the case for a while, all the indexes are overbought on their stochastic readings, but have yet to generate cautionary bearish crossover signals.
The data is largely neutral, but one is edging close to a negative signal:
- The one-day McClellan overbought/oversold oscillators are still neutral (All Exchange: 26.28; NYSE: 38.15; Nasdaq: 18.47).
- The percentage of S&P issues trading above their 50-day moving average, a contrarian indicator page, rose to 79% and still neutral but very close to an 80% bearish reading that has been a prescient signal for market corrections historically.
- The contrarian detrended Rydex Ratio dipped to 0.46 and is neutral as the leveraged exchange-traded fund traders have yet to embrace the rally. We view that as a positive.
- The Open Insider Buy/Sell Ratio rose to 27.1% and remains neutral.
- This week’s American Association of Individual Investors Bear/Bull Ratio, a contrarian indicator, is unchanged at 0.61, staying neutral.
- The contrarian Investors Intelligence Bear/Bull Ratio remains neutral at 22.6/49.2 as the number of bulls rose.
Finally, valuation does remain a concern. The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dipped further to $256.95. That leaves its forward price-to-earnings at 22.3 still well above the “rule of 20” ballpark fair value at 16.3. We believe this premium still presents some risk. Its earnings yield is 4.49%.
Treasury and Buck
The 10-year Treasury yield declined to 3.74%. Support is 3.57% and resistance at 3.79%. Its near-term trend is bearish. The U.S. Dollar, via the Dollar Index Bullish Fund UUP, closed lower at $28.03 and below support. Its trend is bearish with new support at $28.0 and resistance at $28.15.
Bottom Line
In conclusion, the data may be casting a few shadows for the near term. It suggests we exercise some patience on the buy side to add to names that fit our technical/fundamental requirements.