Is the Great Rotation Underway?
Concerns about investor sentiment and market valuation persist.
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As we enter the second half of the year, the overall message appears to be one of possible rotation from mega-cap issues into mid-to smaller-caps.
The major equity indexes closed mostly lower Friday while market internals were bullish on the NYSE and Nasdaq on heavy trading volume. They closed near their intraday lows to midpoints of the session with two of the indexes turning neutral from their previous bearish trends as did some of the cumulative advance/decline lines.
However, on the data front, our concerns regarding investor psychology and valuation have yet to be relieved.
We continue to interpret the message coming from the data and charts as one suggesting caution from a macro perspective.
Russell and Transports Turn Neutral From Bearish
On the charts, the Dow Jones Transports, MidCap 400 and Russell 2000 (see below) closed higher Friday as the rest dropped in value.
Market internals were positive on the NYSE and Nasdaq as trading volumes rose, leaving the charts near either their lows or midpoints of the day.
Some positive technical events occurred on the Transports and Russell as both closed above near-term resistance and their downtrend lines, turning said trends from bearish to neutral on both.
Only the MidCap 400 remains bearish with the rest in uptrends.
Also, we saw some improvement in market breadth as the cumulative advance/decline lines for the All Exchange and Nasdaq joined the NYSE in neutral implications versus their prior negative signals.
On the cautionary side, the S&P 500 and Nasdaq Composite registered bearish stochastic crossover signals, adding to our sense that some market rotation may be in its nascent phase.
Mixed Data
The 1-Day McClellan Ooverbought/Oversold Oscillators are still neutral (All Exchange: +6.1 NYSE: +5.86 Nasdaq: +7.18).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dipped to 47% staying neutral.
Of note, the detrended Rydex Ratio (contrarian indicator) remains bearish as it rose to 1.19.
Two of the three sentiment indicators are still cautionary with last week’s AAII Bear/Bull Ratio (contrarian indicator) a neutral 0.69, as the Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 17.6/60.3 as bulls well outweighed bears.
The Open Insider Buy/Sell Ratio remains neutral at 38.1.
Leveraged ETF sentiment is 7.2 remaining neutral.
Valuation Above 'Ballpark'
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg declined to $253.40 per share. Its forward P/E multiple of 21.5x remains well above the “rule of 20” ballpark fair value at 15.7x. It remains an important concern for us as an almost 600-basis point premium is significant.
The S&P's earnings yield is 4.62%.
The 10-Year Treasury yield rose to 4.34%. Support is 4.18% and resistance is 4.35%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed flat at $29.13. Its trend remains bullish. Support is $28.89 and $29.23 is resistance.
Bottom Line
While we are seeing some improvements in breadth, valuation and sentiment remain disturbing. As such, it is too early to assume a change in our current cautious near-term view for equities.
Sell signals on individual names should be honored with any buying being done on a very selective basis.