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The S&P's Forward Valuation Remains Stretched as Insiders Lighten Up

Index near-term trends remain positive.
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Recent market action has us on the edge of our seats.

All the major equity indexes closed near their intraday highs Tuesday with one index managing to close above resistance.

Yet, while bullish trends should be respected until proven otherwise, we remain concerned about the extended forward 12-month valuation of the S&P 500 while insiders have been lightening up on their holdings and some bearish stochastic crossover signals were generated at the end of Tuesday's session.

Thus, our concerns suggest some further patience may likely be required before making further commitments to equities as we await better buying opportunities.

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Chart Source: Worden

On the charts, all the major equity indexes closed higher Tuesday with positive NYSE and Nasdaq internals on higher volume. All closed near their highs of the day with the DJIA (see above) closing above resistance.

The session left all the index charts in near-term uptrends and have yet to generate any cautionary sell signals. As such, said trends should be respected.

Market cumulative breadth remains strong with the All Exchange, NYSE and Nasdaq all positive and above their 50-day moving averages. However, the stochastic readings generated bearish stochastic crossover signals on the MidCap 400, Russell 2000 and Value Line Arithmetic Index that cast some clouds.

Insiders Lighten Up

The data dashboard remains generally neutral, including all the 1-Day McClellan Overbought/Oversold Oscillators (All Exchange: +13.09 NYSE: +1.25 Nasdaq: +21.93).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 71% and remains on a neutral signal.

We would note the Open Insider Buy/Sell Ratio dropped to 25.1 and is very close to turning bearish, as insiders have stepped up their selling over the past few sessions. A reading below 25 would turn on a red light for that indicator.

The Open Insider buy/sell ratio is 25.1% (neutral)

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The detrended Rydex Ratio (contrarian indicator), on the other hand, rose to +0.33 as they were buyers of the weakness, in contrast to the insiders, and is also neutral.

This week's AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.17 as bearish sentiment declined and has shifted to neutral from bullish.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) is also neutral at 28.0/45.4. Our biggest concern continues to be what we see as extended valuation.

S&P's Forward Valuation Remains Stretched

The forward 12-month consensus earnings estimates from Bloomberg for the S&P finally saw an uptick of $0.06 to $217.80 per share. However, its forward P/E multiple rose to 19.1x and remains at a significant premium to the "rule of 20" ballpark fair value that dipped to 16.3x due to the lift in the 10-Year Treasury yield. It remains a cause for concern, in our view.

The S&P's forward earnings yield is 5.23%.

The 10-Year Treasury yield closed higher to 3.67%. It is now short-term neutral and just short of resistance at 3.68%. We see support at 3.49%.

Our Market Outlook

While the charts and market breadth have yet to suggest signs of caution on their part, the extended valuation of the S&P 500 combined with insider activity and bearish stochastic crossover signals are keeping us on the edge of our seat as they imply the potential for some market weakness that may afford better buying opportunities.

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