Wall Street Might Be Getting Ahead of Itself

The technicals have a message for the market: Calm down.

We saw the major equity indexes close mixed on Thursday, with negative New York Stock Exchange internals and mixed ones for the Nasdaq. Most closed near their intraday lows. But two indexes, the Dow Jones industrial average and the mid-caps made new closing highs. All the charts and cumulative market breadth are still in uptrends. 

The concern, however, is an excess of bullish investor sentiment and a forward valuation for the S&P that's still significantly above ballpark fair value. This means some tempering of enthusiasm is needed. 

Charts and Technicals

On the charts, the major equity indexes closed mixed yesterday with mostly negative internals as we see a bit too much bullish sentiment expectations and too high forward valuation. Here's what we saw:

• Gains were achieved on the Dow Jones industrial average, the Nasdaq Composite, Nasdaq 100 and the mid-caps, while the S&P 500, Dow Jones and Russell 2000 posted losses with most closing near their session lows. Yet, positive technical events occurred ,as the Dow Jones industrials and mid-caps made new closing highs, leaving all the charts in near-term bullish trends. This trend should be respected until proven otherwise. Same goes for the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq. 

• Note, however, that the S&P and Dow Jones Transports registered cautionary bearish stochastic crossover signals.

• The data remains largely neutral and nonthreatening, except for investor sentiment and valuation. 

• The one-day McClellan overbought/oversold oscillators are still neutral and nonthreatening (All Exchange: +19.02; NYSE: +5.87; Nasdaq: +27.74). 

• The percentage of S&P issues trading above their 50-day moving averages, a contrarian indicator, dipped to 76%, staying neutral. 

• The Open Insider Buy/Sell Ratio rose to 26.5, shifting its previous bearish signal to neutral.

• But the detrended Rydex Ratio, a contrarian indicator, at 1.1 is bearish as the leveraged exchange-traded fund traders are now leveraged long after a significant rally. 

• This week’s American Association of Individual Investors Bear/Bull Ratio, a contrarian indicator, turned bearish at 0.53 as the crowd is donning their party hats. The Investors Intelligence Bear/Bull Ratio, another contrarian indicator, also turned bearish with bulls overwhelming bears at 21.3/55.7. They suggest there is an excess of bullish expectations currently. 

• Finally, valuation remains a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg lifted to $255.59 but its forward price-to-earnings of 22.9 remains well above the “rule of 20” ballpark fair value, as has been the case for the past several months, at 15.9. We believe this premium still presents some risk. Its earnings yield is 4.38%.

 Treasury and the Buck

The 10-year Treasury yield rose to 4.1%. Support is 3.81% with resistance at 4.11%. Its near-term trend is bullish. The U.S. Dollar, via the U.S. Dollar Index Bullish Fund UUP closed higher at $29.10. Its trend is bullish with support at $28.84 and new resistance at $29.11.

The Bottom Line

We respect the market’s currently bullish technical setup, but valuation and investor sentiment levels are at cautionary levels.