This Oscillator Is Batting a Thousand Signaling Market Tops the Last 2 Years
All the major equity indexes closed higher Wednesday with bullish internals on the NYSE and Nasdaq as NYSE volumes dropped and Nasdaq volumes rose. All closed near their session highs with four of the indexes making new all-time closing highs with cumulative market breadth staying bullish.
While several of the data points are neutral, the 1-day McClellan OB/OS Oscillators are overbought. Of particular note, the NYSE McClellan 21-day is sending a cautionary signal as it has risen to a level that has marked market tops four out of four times over the past two years.
Additionally, forward valuation for the S&P 500 remains very extended.
So, while we continue to respect the current market trends, we believe enthusiasm should be tempered as valuation and the NYSE 21-day suggest buying should remain very selective while also honoring sell signals on individual names.
New Closing Highs on Four Indexes
On the charts, all the major equity indexes closed higher Wednesday with bullish internals as all closed near their session highs, thus keeping their near-term uptrends intact except for the Dow Jones Transports, which is neutral.
Notably, the S&P 500, DJIA, Nasdaq Composite (see below) and Nasdaq 100 made new all-time closing highs.
Chart Source: Worden
Cumulative market breadth remains supportive as well with the advance/decline lines for the All Exchange, NYSE and Nasdaq bullish and above their 50-day moving averages.
So, the technical picture remains strong.
The stochastic levels are still overbought on all but have yet to register bearish crossover signals.
NYSE 21-Day McClellan Oscillator Flashes Caution Signal
The data are a bit more mixed.
All the 1-Day McClellan Overbought/Oversold Oscillators are still overbought (All Exchange: +73.74 NYSE: +84.85 Nasdaq: +68.57).
We would highlight that the NYSE 21-day chart (see below) is at a level that has signaled market tops consistently four times over the past two years. It’s a yellow flag worth watching.
The NYSE ratio adjusted 1-day McClellan OB/OS is +84.85 (bearish) and +119.75 (very bearish) on the 21-day.
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 64% and is neutral.
The detrended Rydex Ratio (contrarian indicator) dropped to 0.63 and also remains neutral.
This week’s AAII Bear/Bull Ratio (contrarian indicator) declined to 0.81 and is neutral as well.
The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still mildly bearish at 18.7/50.0 as bulls outweigh bears.
As such, two of the three sentiment data points are still neutral.
The Open Insider Buy/Sell Ratio is neutral and unchanged at 35.6.
Leveraged ETF sentiment is -0.8, remaining neutral.
A 500 Basis Point Premium
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg rose slightly to $244.71 per share. Its forward P/E multiple is now 21.7x and remains well above the “rule of 20” ballpark fair value of 15.6x. In our view, a 500-basis point premium remains a significant cause for concern.
The S&P's earnings yield is 4.61%.
The 10-Year Treasury yield slipped to 4.36%. Its trend is bullish with support at 4.36% and resistance at 4.57%.
The U.S. dollar, via the (UUP) ETF, closed lower at $28.49 and is neutral. Support is $28.49 and $29.08 is resistance.
Bottom Line
The current market charts and breadth are positive and should be honored until suggesting otherwise. However, while the data are largely neutral, valuation and the OB/OS levels continue to suggest exercising some caution by honoring sell signals on individual positions and being very selective buyers.