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This Key Stock Index Just Joined Up With the Bulls

However, more cracks are appearing in the proverbial 'wall of worry.'
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Thursday's stock market action left our assessment of near-term market probabilities intact. We continue to expect some retracement of the sizable gains in equities post the October lows. Thursday also saw one of the main equity indexes turn bullish, from neutral.

While charts and market breadth have yet to generate significant signs of potential weakness, more cracks are appearing in the proverbial "wall of worry" on our data dashboard, as discussed below.

When valuation is added into the mix, the weight of the evidence still suggests an increasing probability that better buying opportunities will be afforded in the relatively near term.

DJIA Trend Turns Bullish From Neutral

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Chart Source: Worden

On the charts, the major equity indexes closed mixed again on Thursday with positive NYSE internals while the Nasdaq had positive breadth but negative up/down volume as volumes rose on both.

Most closed near their highs of the day that saw the DJIA (see above) close above resistance, turning its near-term trend to bullish from neutral and joining the MidCap, Russell 2000 and Value Line Arithmetic Index in that status, with the rest staying neutral.

Cumulative market breadth remains positive on the NYSE, All Exchange and Nasdaq advance/decline lines.

However, the Nasdaq Composite and Nasdaq 100 generated bearish stochastic crossover signals, suggesting the potential for some weakness.

More Warning Signs From Data Imply Some Retracement of Recent Gains

The data, in our opinion, is increasing its warning signs that imply the increasing likelihood that some degree of retracement of the market's notable gains.

The 1-Day McClellan Overbought/Oversold Oscillators are still overbought on the All Exchange, NYSE and Nasdaq (All Exchange: +64.96 NYSE: +82.40 and Nasdaq: +53.79).

Of note, the percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 80%, which officially puts it in bearish territory.

% of S&P 500 Stocks Above Their 50 DMAs Is 80% (Bearish)

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The Open Insider Buy/Sell Ratio slipped to 45.6, and is neutral, while the detrended Rydex Ratio (contrarian indicator) remains bearish at 1.14. We reiterate that the usually wrongly leveraged ETF traders are now leveraged long post an almost 3,000-point gain on the DJIA while they were leveraged short near its recent lows. Again, this particular data point has been a historically prescient signal.

The Leveraged ETF sentiment rose slightly to 28.9 but remains neutral.

Also of import is this 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) is close to bearish levels as well at 22.4/52.2.

Valuation Disparity Continues

The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg declined to $235.84 per share, lifting its forward P/E multiple to 19.4x, still well above the "rule of 20" ballpark fair value at 15.7x. It remains a cause for some concern.

The S&P's earnings yield is 5.16%. The 10-year Treasury yield moved higher to 4.35%. It is in a bearish trend with support is 4.22% and resistance at 4.47%.

The U.S. Dollar, via the (UUP) ETF, rose to $29.29 and is also in a bearish trend. Support is $28.82 with resistance at $29.36.

Bottom Line

While the equity indexes are churning sideways of late, the weight of the evidence is increasingly suggesting better there will be buying opportunities over the near term. As such, while we are not fighting the current trends, we are not chasing price at current levels.

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