This Unhealthy Combination Suggests Market Risk Is High
Here's why caution is warranted for stocks and buying should be selective.
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The S&P 500, Nasdaq Composite and Nasdaq 100 continue to post new closing highs. However, these highs were achieved Tuesday as market breadth weakened, implying an unstable foundation.
The near-term trends for the major equity indexes are a mix of bullish and bearish projections while the forward valuation for the S&P 500 remains very extended above ballpark value, while the sentiment indicators continue to reveal an excess of bullish expectations.
More New Closing Highs on Negative Breadth
On the charts, the major equity indexes closed mixed Tuesday with negative NYSE internals while the Nasdaq had negative breadth but positive up/down volume.
Most closed near their session lows with the S&P 500, Nasdaq Composite and Nasdaq 100 making new closing highs as the rest declined.
Yet we would reiterate said highs are being achieved with fewer stocks advancing as can be observed by the unweighted S&P 500 making a series of lower highs as the weighted index makes higher highs. This condition is not healthy.
As such, the trends are unchanged with the S&P (see below), DJIA, Nasdaq Composite and Nasdaq 100 bullish with the Dow Jones Transports, MidCap 400 and Russell 2000 bearish.
Cumulative market breadth weakened with the All Exchange and NYSE advance/decline lines turning neutral from bullish as is the Nasdaq’s.
No stochastic signals of import were generated.
Mixed Data
The 1-Day McClellan Overbought/Oversold Oscillators are still neutral (All Exchange: +6.41 NYSE: -5.66 Nasdaq: +14.14).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dipped to 43%, staying neutral.
Of note, the detrended Rydex Ratio (contrarian indicator) remains bearish at 1.15 with the leveraged ETF traders leveraged long again.
Thus, two of the three sentiment indicators are bearish with this week’s AAII Bear/Bull Ratio (contrarian indicator) dropping to 0.59 and neutral as the Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 16.9/63.1 as bulls continued to outweigh bears by a wide margin.
The Open Insider Buy/Sell Ratio remains neutral dropping to 27.1, its lowest level in three months.
Leveraged ETF sentiment is 25.6 remaining neutral.
Valuation Premium Widens
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dropped to $252.85 per share from $253.28, leaving its forward P/E multiple at 22.1x and well above the “rule of 20” ballpark fair value at 15.7x. It remains an important concern for us as a 640-basis point premium is significant.
The S&P's earnings yield is 4.53%.
The 10-Year Treasury yield rose to 4.3%. 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 higher at $28.96. Its trend is neutral with support at $28.88 and resistance at $29.23.
Bottom Line
The combination of the issues notesd above suggest, via our discipline, overall market risk is high. We suggest some caution remains warranted for equities.
Sell signals on individual names should continue to be honored and any buying should be done on a very selective basis.