Overbought Oscillators Suggest the Market Is Due for a Pause
The major equity indexes closed mixed Tuesday, leaving their near-term trends evenly split between neutral and bullish projections while cumulative market breadth remains bullish.
However, the data finds the 1-day McClellan OB/OS Oscillators overbought and implying some pause/consolidation of the recent market gains. And while the rest of the data are largely neutral, concerns about an overvalued S&P 500 continue to nag us.
As such, while we have seen some improvements of late, our discipline of honoring sell signals on individual names while remaining very selective on the buy side remains appropriate, in our opinion.
Index Trends Split Between Neutral & Bullish
Chart Source: Worden
On the charts, the indexes closed mixed yesterday with the Nasdaq Composite and Nasdaq 100 (see above) posting losses while the rest saw modest gains.
The NYSE had positive breadth but negative up/down volume while the Nasdaq saw the opposite as trading volumes increased in both.
No technical events of import were generated, leaving the S&P 500, Nasdaq Composite, Nasdaq 100 and Russell 2000 in near-term bullish trends and the rest neutral.
Cumulative market breadth remains bullish on the All Exchange, NYSE and Nasdaq.
All the stochastic levels are quite overbought but have yet to signal bearish crossovers. They are capable of staying overbought for extended periods.
McClellan Oscillators Still Overbought & Suggesting Pause
Looking at the data, it remains largely neutral.
However, the 1-Day McClellan Overbought/Oversold Oscillators are still overbought and suggesting some further near-term pause/consolidation (All Exchange: +76.01 NYSE: +91.62 Nasdaq: +68.11).
The All Exchange ratio adjusted 1-day McClellan OB/OS is +76.01 (bearish) and +0.90 (neutral) on the 21-day.
The percentage of S&P 500 issues trading above their 50-day movig averages (contrarian indicator) rose to 53% and is neutral.
The detrended Rydex Ratio (contrarian indicator) jumped to 0.85 from 0.37 but remains neutral.
This week’s AAII Bear/Bull Ratio (contrarian indicator) rose to 0.92 and is neutral as well.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is the only mildly bearish warning at 19.7/47.0 as bulls outweigh bears by more than 2 to 1.
As such, two of the three sentiment data points are still neutral.
The Open Insider Buy/Sell Ratio is also neutral but dropped to 41.1 as insiders did some more selling.
Leveraged ETF sentiment is -10.8, remaining neutral.
Valuation
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg edged up to $244.56 per share. But its forward P/E multiple is 21.2x and remains well above the “rule of 20” ballpark fair value of 15.5x. That 500-basis point premium remains a significant cause for concern.
The S&P's earnings yield is 4.44%.
The 10-Year Treasury yield slipped to 4.46% and below support. Its trend is bullish with new support at 4.36% and resistance at 4.57%.
The U.S. dollar, via the (UUP) ETF, closed higher at $28.76 and is neutral. Support is $28.49 and $29.08 resistance.
Bottom Line
While the charts and breadth have improved, the OB/OS may now provide some headwind.