While Clouds Are Parting, Some Indicators Look a Bit Foggy
Let's see why buying on weakness could work, but caution is still advised.
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We're getting some mixed market signals as the charts are mostly bullish, but the data remains mostly neutral and breadth ... well, kinda cloudy.
The major equity indexes closed higher Thursday with positive New York Stock Exchange and Nasdaq internals, as trading volumes rose from the prior session. Most closed near the midpoint of their intraday ranges with the S&P 500 making a new closing high that leaves the bulk of the index chart trends bullish.
But market breadth is a bit cloudier and a we have a mix of neutral and bearish trends. The data appears not-so-threatening for the most part, except for the percentage of S&P stocks above their 50 day-moving average turning bearish. This historically has been a key indicator ahead of market corrections.
Also, forward valuation of the S&P 500, based on Bloomberg’s forward 12-month earnings estimates continues to be very extended above ballpark fair value, as has been the case for several months.
Charts and Technicals
On the charts, all the major equity indexes closed higher yesterday with positive NYSE and Nasdaq internals on heavier trading volume.
Most indexes closed near the middle of their intraday ranges. The S&P 500 managed to make a new closing high that left all the index charts in near-term bullish trends except for the mid-caps and small-caps on the Russell 2000, which are neutral.
Cumulative market breadth, however, did not improve. The advance/decline lines for the All Exchange and NYSE and neutral with the Nasdaq’s bearish. Participation has become more selective.
Most of the stochastic levels are overbought but no new bearish crossover signals have appeared.
The data is largely neutral and not very instructive as to near-term probabilities.
The one-day McClellan overbought/oversold oscillators are still neutral (All Exchange: 9.45; NYSE: 6.12; Nasdaq: 11.45).
But the percentage of the S&P issues trading above their 50-day moving averages, a contrarian indicator, rose to 80% and bearish. It should not be ignored as it has been quite prescient ahead of market corrections.
The detrended Rydex Ratio, a contrarian indicator, rose to 0.51 and neutral as the leveraged exchange-traded fund traders have yet to embrace the rally. We view that as a potential positive.
The Open Insider Buy/Sell Ratio, meanwhile, slipped to 26.8% and remains neutral.
This week’s American Association of Individual Investors Bear/Bull Ratio, a contrarian indicator, is unchanged at 0.61, staying neutral.
Another contrarian indicator, the Investors Intelligence Bear/Bull Ratio remains 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 SPX from Bloomberg is unchanged at $256.94, leaving its forward p/e at 22.4 still well above the “rule of 20” ballpark fair value at 16.2. We believe this premium still presents some risk.
Its earnings yield is 4.47%.
The Buck, Treasury
The 10-year Treasury yield rose to 3.79%. 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 and below support at $28.08. Its trend is bearish with new support at $28.07 and resistance at $28.21.
The Bottom Line
In conclusion, while there are a few clouds overhead and we would not chase price, we are still buyers on weakness of names that fit our fundamental/technical requirements.