Skip to main content

Here's Where the Market Stands After Friday's Bounce

A key contrarian indicator has turned very bullish.
  • Author:
  • Publish date:
Comments

All the major equity indexes closed higher Friday leaving the technical trends a mix of bullish and neutral implications for the near-term.

The data saw some shifting, though, with some of the 1-day McClellan OB/OS Oscillators overbought while the detrended Rydex Ratio (contrarian indicator) turned vey bullish as the leveraged ETF traders extended their already heavily leveraged short exposure.

We believ the weakness seen in the middle of last week was a continuation of consolidation of the rally gains. So, although valuation has become a bit stretched, we continue to believe buying weakness near support remains appropriate.

Friday's Bounce Leaves Indexes Bullish & Neutral

On the charts, all the major equity indexes closed higher Friday with positive internals and heavy trading volume. All but one, the S&P 500, closed near their highs of the day.

The only technical event of importance was the Dow Jones Transports closing above resistance.

As such, the Dow Transports, MidCap 400, Russell 2000 and Value Line Arithmetic Index remain in near-term uptrends with the rest neutral.

Also, all but the S&P 500, Nasdaq Composite and Nasdaq 100 are above their 50-day moving averages.

Cumulative market breadth remains neutral on the All Exchange, NYSE and Nasdaq.

Stochastic readings are generally neutral except for the Nasdaq Composite and Nasdaq 100, which are very oversold but have yet to register bullish stochastic crossover signals.

We would also note the weakness of the U.S. dollar on Friday had some positive impact on several of the commodity charts.

McClellan Oscillators Mixed as Contrarian Indicator Turns Very Bullish

The McClellan OB/OS Oscillators shifted their oversold signals with the All Exchange: +52.12 mildly overbought, the NYSE: +73.56 overbought and the Nasdaq: +37.8 neutral.

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 57, staying neutral.

The Open Insider Buy/Sell Ratio slipped to 35.7, also staying neutral.

Importantly, in our opinion, the detrended Rydex Ratio, (contrarian indicator) deepened to -2.03 and is now very bullish as leveraged short-sellers extended their leveraged short exposure. We continue to see their status as a potential upside catalyst for the markets.

Last week's AAII Bear/Bull Ratio (contrarian indicator) dipped to 2.27 but also remained on a very bullish signal as did the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 38.5/36.9 as bears dropped and bulls rose but remained on its bullish.

Market Valuation Becoming Stretched

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 has dipped again $226.52 per share. As such, the S&P's forward P/E multiple is 16.6x and at a premium to the "rule of 20" ballpark fair value of 15.8x.

The S&P's forward earnings yield is 6.0%.

The 10-Year Treasury yield closed higher at 4.16%. We continue to view support as 3.85% with resistance at 4.43%.

Our Market Outlook

Friday's strong performance suggests to us the weakness experienced mid-week was a continuation of consolidation of the mid-October rally gains. We remain of the opinion that buying weakness near support is appropriate.

At the time of publication, Ortmann had no positions in any securities mentioned.