Rally Leaves Index Trends Unchanged At Neutral

All the major equity indexes closed higher Thursday with positive terminals on the NYSE and Nasdaq with NYSE volumes flat as the Nasdaq’s volume rose from the prior session. All closed at or near their intraday highs. However, no violations of resistance were generated, leaving all in near-term neutral trends.

The data is mostly neutral, including the McClellan 1-Day OB/OS Oscillators that, in our view, continue to suggest tests of the chart resistance levels over the near term. The only outlier, in our opinion, is valuation as 12-month forward consensus earnings estimates via Bloomberg continue to erode, leaving current valuation at a premium to ballpark fair value via the “rule of 20”On the charts, all the major equity indexes closed higher yesterday with positive internals with all closing near their intraday highs.

• However, the strength was insufficient in its ability to push the indexes above their near-term resistance levels, leaving all in near-term neutral trends.
• Yet cumulative market breadth improved with the advance/decline lines for the All Exchange, NYSE and NASDAQ turning neutral from negative.
• We would also note the VALUA generated a bullish stochastic crossover signal while the S&P 500, COMPQX, and Nasdaq 100 remain oversold with potential to send a signal similar to the VALUA.

The McClellan OB/OS Oscillators remain neutral and not threatening at current levels, in our view (All Exchange: -12.87 NYSE: -13.68 Nasdaq: -12.46).

• The % of SPX issues trading above their 50 DMAs (contrarian indicator) rose to 84% and is now cautionary versus its prior neutral implication.
• The Open Insider Buy/Sell Ratio rose again to 54.8% as insiders did a little buying but remained neutral as well.
• The detrended Rydex Ratio (contrarian indicator) dipped to -0.74 and is also neutral.
• This week’s AAII Bear/Bull Ratio (contrarian indicator) was unchanged at 1.28, staying on a bullish.
• The Investors Intelligence Bear/Bull Ratio (contrary indicator) was also unchanged with the number of bears dropping and bulls at 27.8/44.4 (mildly bullish). Its 3-week moving average is mildly bullish at 70.75.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX continued to shrink down to $232.51. As such, the valuation spread widened a bit and is still at a premium to ballpark fair value via the “rule of 20” with the SPX forward multiple at 18.1 versus 17.0.
• The SPX forward earnings yield is 5.54%.
• The 10-year Treasury yield closed lower at 3.03%. Support 2.92% with resistance at 3.16%.

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In conclusion, we speculated in yesterday’s note that the charts and data were implying a possible test of the various index resistance levels. The close, in our opinion, added to that likelihood given the neutral OB/OS levels, breadth improvement and stochastic implications. Our one concern is the continuing deterioration of SPX earnings expectations that have pushed valuation to a premium.

Written By: Guy S. Ortmann, CMT