New Closing Highs But On Negative Breadth

Insider Selling Activity Increases Further

The major equity indexes closed mostly higher Thursday with several new closing highs being achieved, although on minor gains. Internals, however, were negative on the NYSE and NASDAQ that, in our opinion, take some of the shine off of the chart achievements. Yet the indexes remain in near-term uptrends with positive cumulative breadth. However, while the McClellan 1-day OB/OS oscillators have dropped back into neutral territory, the OpenInsider Buy/Sell Ratio finds insiders ramping up their selling activity to levels seen just before last March’s market declines while the leveraged ETF traders remain heavily leveraged long. Thus, given the battle between the charts and the OI/Rydex data, we remain near-term “neutral” in our macro-outlook for equities in general.

On the charts, the DJI (page 2) and DJT (page 4) closed lower yesterday as the rest posted minor gains resulting in the SPX (page 2), COMPQX (page 3), NDX (page 3), MID (page 4) and VALUA (page 5) making new closing highs by a few points.

• Of some import, in our view, is the fact that said gains were achieved on negative market breadth. A
• ll of the charts remain in near term uptrends as do the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ.
• The stochastic levels are still well into overbought territory but have yet to flash bearish crossover warning signals.
• Sell signals are absent.

Looking at the data, the McClellan 1-day OB/OS Oscillators have all dropped back to neutral readings post their overbought levels early in the week (All Exchange: +29.45 NYSE: +31.26 NASDAQ: +26.76).

• Yet we are still seeing insiders ramping up their selling activity, now to levels seen just prior to last March’s selloff at a bearish 19.9 OpenInsider Buy/Sell Ratio.
• In contrast, the leveraged ETF traders measured by the detrended Rydex Ratio (contrarian indicator page 8) are maintaining their very leveraged long exposure at a bearish 1.46. At the risk of being redundant, we have found the Rydex/Insider dynamic at current levels to typically be a prescient indicator regarding market pullbacks or at least pauses although it may not pinpoint the exact timing.
• This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) remains on a bearish signal at 16.9/57.8 as bullish sentiment dipped slightly.
• Valuation continues to appear extended. The forward 12-month consensus earnings estimate from Bloomberg rose to $172.43, leaving the SPX forward multiple at 22.7 while the “rule of 20” finds fair value at 18.8. Again, the valuation spread has been consistently wide over the past several months while the forward estimates have continued to rise consistently.
• The SPX forward earnings yield is 4.4% with the 10-year Treasury yield dropping to 1.16%.

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In conclusion, while the charts remain positive, the Rydex:Insider condition suggests some caution is warranted when approaching the equity markets. Thus, we are maintaining our near-term “neutral” macro-outlook for equities in general.

SPX: 3,860/NA

DJI: 31,143/NA

COMPQX: 13,600/NA

NDX: 13,400/NA

DJT: 12,577/13,000

MID: 2,450/NA

RTY: 2,175/NA

VALUA: 8,470/NA

Written By: Guy S. Ortmann, CMT