The S&P 500 Is Carrying the Weight of Divergence
The performance of the unweighted S&P versus the weighted version makes a bullish outlook a heavy lift.
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The major equity indexes closed mixed on Friday with negative NYSE internals while the Nasdaq saw negative breadth but positive up/down volume. More new closing highs were achieved on three of the large-cap weighted indexes, leaving the near-term trends unchanged and mixed. There was also some improvement in cumulative market breadth as well as one of the sentiment indicators.
While the improvements noted above are helpful, we believe they are being counterbalanced to some degree by the fact that the unweighted S&P has been making lower highs while the weighted version is making higher highs. This divergence is also disconcerting.
What's more, the forward valuation of the S&P 500 remains more than 600 basis points above ballpark fair value and is a major concern.
More New Closing Highs as Breadth Improves
On the charts, the major equity indexes closed mixed on Friday with generally negative internals.
However, gains were achieved on the S&P 500, DJIA, Nasdaq Composite and Nasdaq 100, with the S&P, and nasdaq indexes making new closing highs.
Near-term trends were unchanged with the S&P, DJIA, Nasdaq Composite and Nasdaq 100 bullish, the MidCap 400 and Russell 2000 bearish (see below) and the Dow Jones Transports neutral.
There was some improvement in cumulative breadth with the All Exchange joining the NYSE as it turned bullish. However, the Nasdaq’s A/DE remains neutral.
Also, a bearish stochastic crossover was registered on the DJT.
Digging Into the Data
The data are mostly neutral.
The 1-Day McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: +14.07 NYSE: +15.83 Nasdaq: +12.59).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 43%, staying neutral.
Of note, the detrended Rydex Ratio (contrarian indicator) shifted back to neutral from bearish at 0.79. Thus, two of the three sentiment indicators are now neutral with last week’s AAII Bear/Bull Ratio (contrarian indicator) unchanged at a neutral 0.69.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 17.6/60.3 as bulls continued to outweigh bears by a wide margin.
The Open Insider Buy/Sell Ratio remains neutral at 38.2.
Leveraged ETF sentiment is 11.7, remaining neutral.
Valuation Stretches Even Further
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg rose to $253.35 per share, lifting its forward P/E multiple to 22.0x and well above the “rule of 20” ballpark fair value at 12.7x. This is an important concern for us as a 600-basis point premium is significant.
Thne S&P's earnings yield is 4.55%.
The 10-Year Treasury yield dipped to 4.27% and below support. New support is 4.25% and resistance is at 4.40%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed lower at $28.88. Its trend is neutral with support at $28.88 and resistance at $29.23.
Bottom Line
Valuation and the weighted versus unweighted divergence still suggest one should exercise some concern regarding equities in general.
We continue to believe the market should be approached with some caution where sell signals on individual names should be honored and buying should be very selective.