Watch Out for These Two Data Points
We see reasons to be cautious, despite the trends in the indexes.
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The Dow Jones industrial average is at a new closing high and the charts are mostly bullish. Don't get too comfortable, however, as we see two data points that are unsettling.
We'll get to those further down, but first let's look at the overall data, which remains ... for now ... mostly neutral.
The major equity indexes closed mixed Friday with positive New York Stock Exchange and Nasdaq internals, as trading volumes declined from the prior session with all the indexes closing near their intraday lows. The only technical event of import was the Dow making a new closing high, as the index charts remain mostly bullish.
We also saw some improvement in market breadth. The data dashboard is on generally neutral readings, except for one prescient indicator flashing a red light while contrarian investor sentiment data finds the crowd getting a bit too enthusiastic and forward valuation of the S&P 500 remaining extended.
Charts and Technicals
Overall we believe the charts and data continue to imply some sideways chop over the near term.
The S&P 500, Nasdaq composite and Nasdaq 100 all posted losses Friday as the rest advanced.
Market internals were positive on the NYSE and Nasdaq but on lighter volume from the prior session.
There were no changes regarding their near-term trends with the mid-caps and the Russell 2000 neutral as the rest are bullish.
There was some improvement in cumulative breadth with the All Exchange and NYSE advance/decline lines turning bullish from neutral and the Nasdaq’s neutral versus bearish.
The stochastic levels remain overbought but have not registered any new bearish crossover signals thus far.
The one-day McClellan overbought/oversold oscillators are still neutral (All Exchange: +20.43 NYSE: +17.4 Nasdaq: +23.32).
But we have two warning signs. First, the percentage of S&P 500 issues trading above their 50 day moving averages -- a contrarian indicator -- rose further into bearish territory at 82%. This should not be ignored as it has been quite prescient ahead of market corrections of varying degrees.
Also, the detrended Rydex Ratio rose to 0.96 from 0.51. It is still neutral, but the leveraged exchange-traded fund traders are getting more bullish. We view that as a potential negative.
The Open Insider Buy/Sell Ratio rose to 29.7% and remains neutral.
Last week’s American Association of Individual Investors Bear/Bull Ratio was unchanged at 0.61, staying neutral.
The Investors Intelligence Bear/Bull Ratio (contrary indicator page 8) remained neutral at 22.6/49.2 as the number of bulls rose.
Finally, valuation does remain a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg dropped to $256.61, leaving its forward price-to-earnings at 22.4 still well above the “rule of 20” ballpark fair value at 16.3. We believe this premium still presents some risk.
Its earnings yield is 4.47%.
The Treasury and the Buck
The 10-year Treasury yield rose to 3.75%. Support is 3.57% and resistance at 3.79%. Its near-term trend is now neutral versus its previously bearish trend.
The U.S. Dollar, via the Dollar Index Bullish Fund UUP, closed lower at $28.07. Its trend is bearish with support at $28.07 and resistance at $28.21.
Bottom Line
We have a few clouds overhead, suggesting we avoid chasing price as some sideways chop appears likely.