Index Charts and Breadth Improve, But There's a Catch
Let's see what changed at the end of last week and what to watch out for now.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The charts are improving and cumulative market breadth is strengthening, but don't get too excited -- the valuation gap has also widened.
The major equity indexes did close higher Friday, with positive New York Stock Exchange internals, while the Nasdaq’s were mixed. All closed near their session highs that saw several resistance levels violated, while the Dow Jones industrial average made a new closing high.
Looking at the data dashboard, it is mostly neutral. But the the detrended Rydex ratio has turned bearish with the usually wrong leveraged exchange-traded fund traders jumping back on the bullish side of the fence while forward valuation for the S&P 500, based on Bloomberg’s forward 12-month earnings estimates, is trading at its highest level above ballpark fair value in several months. As such, we suggest not chasing price but buying weakness on stocks that meet our fundamental/technical criteria when they test high volume support levels.
The Charts and Technicals
On the charts, all the major equity indexes closed higher Friday with mostly positive internals.
All but one, the Dow Jones Transports, closed near their session highs with the S&P, Dow Jones, Nasdaq 100, mid-cap stocks and small caps on the Russell 2000 closing above resistance as the Dow made another new closing high.
In addition, the Nasdaq 100 shifted its trend to bullish from neutral as are the S&P and Dow.
The rest are neutral, except for the Russell 2000 staying bearish.
Cumulative market breadth saw some minor improvement with the advance/decline lines for the All Exchange, NYSE and Nasdaq now neutral.
The Russell 2000 did register bullish stochastic crossover.
The data is still largely neutral.
The one-day McClellan overbought/oversold Oscillators are neutral (All Exchange: -16.0; NYSE: -30.37; Nasdaq: -7.26).
The percentage of S&P issues trading above their 50-day moving averages, a contrarian indicator, rose to 75% but stayed neutral.
The detrended Rydex Ratio, another contrarian indicator, however, is back on a red light at 1.01.
In contrast, the Open Insider Buy/Sell Ratio dipped to 43.4 and neutral.
Last week’s American Association of Individual Investors Bear/Bull Ratio, a contrarian indicator, dipped to a neutral 0.58, but the number of bears declined.
The Investors Intelligence Bear/Bull Ratio, a contrary indicator page, remained neutral at 22.6/52.5, but the number of bulls rose.
Finally, valuation does remain a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg dropped to $256.21, pushing its forward price-to-earnings to 22.4 and at its highest level above the “rule of 20” ballpark fair value in several weeks, falling to 16.0. We believe this premium still presents some risk.
Its earnings yield is 4.6%.
The Buck and Treasury
The 10-year Treasury yield rose to 3.98% and above resistance. Support is 3.81% with new resistance at 4.09%. Its near-term trend is bullish.
The U.S. Dollar, via the Dollar Index Bullish fund UUP closed higher as well at $28.67 and also above resistance. Its trend is bullish with support at $28.44 and new resistance at $28.74.
The Bottom Line
We still have a few clouds overhead suggesting some further sideways chop appears likely with potential for some bumps in the road. But we are still buyers near high volume price support of names that fit our fundamental/technical requirements.