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These Historically Prescient Market Indicators Are Flashing Red

Our concerns that the equity markets are likely to experience some consolidation/retracement of their gains from the October lows have fallen on deaf ears -- so far.
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Our concerns that the equity markets are likely to experience some consolidation/retracement of their gains from the October lows, over the near term, have fallen on deaf ears thus far.

The indexes have continued to power north with no sell signals being generated on the charts while market breadth remains positive. However, the data's warning signals continue to rise and well outweigh reward as their flashing red waring lights have intensified further as discussed below.

Green Lights

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Chart Source: Worden

On the charts, all the major equity indexes closed higher Friday with positive NYSE and Nasdaq internals as all closed at or near their intraday highs.

Bullish events occurred as the S&P 500 (see above), Dow Jones Transports, MidCap 400, Russell 2000 and Value Line Arithmetic Index closed above resistance.

Additionally, the S&P's and Dow Transports' near-term trends turned bullish from neutral, leaving all but the Nasdaq Composite and Nasdaq 100 in bullish trends while no notable sell signals have been generated on any of them.

Cumulative market breadth remains bullish as well for the All Exchange, NYSE and Nasdaq.

Multiple stochastic readings remain overbought but no new bearish crossover signals have been generated.

Red Lights

Unlike the charts, the data have multiple red lights flashing that suggest risk outweighs reward for the near term.

The 1-Day McClellan Overbought/Oversold Oscillators are now very overbought on the All Exchange and NYSE with the Nasdaq overbought All Exchange: +100.77 NYSE: +121.73 and Nasdaq: +88.01).

Of note, the percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 85%, which puts it solidly in bearish territory. As the chart below shows, a reading north of 80% has occurred three times in the past two years, each of which was followed by a notable market correction.

% of S&P Stocks Above Their 50 DMAs is 85% (Bearish)

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The Open Insider Buy/Sell Ratio slipped to 42.7, and is neutral while the detrended Rydex Ratio (contrarian indicator) remains bearish at 1.13. Similar to the %50 chart, this particular data point has been a historically prescient signal as well.

The Leveraged ETF sentiment rose slightly to 30.5 but remains neutral.

Also of import was last week's AAII Bear/Bull Ratio (contrarian indicator), which dropped to 0.60 from 0.95 and is close to turning bearish from neutral.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) was close to bearish levels as well at 22.4/52.2.

Valuation

The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg declined to $235.878 per share, lifting its forward P/E multiple to 19.5x, still well above the "rule of 20" ballpark fair value at 15.8x. It remains a cause for some concern.

The S&P's earnings yield is 5.13%.

The 10-Year Treasury yield moved lower to 4.23%. It is in a bearish trend with support at 4.22% and resistance at 4.47%.

The U.S. dollar, via the (UUP) ETF, dropped to $29.20 and is also in a bearish trend. Support is $28.82 with resistance at $29.36.

Bottom Line

The data that have a history of being prescient regarding important market inflection points are flashing red lights. We respect their implications.

As such, our discipline continues to tell us chasing price at current levels may prove regrettable. We remain patient as the data implies better buying opportunities are likely to be forthcoming in the relatively near term.

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