More New Closing Highs As Breadth Narrows

Psychology Data Returns To Some Cautionary Signals

The major equity indexes closed mixed Friday with positive internals on the and although market breadth did narrow. Several of the indexes posted new closing highs while all are now in technical near-term uptrends. As such, the charts are positive while the data dashboard has reignited some cautionary sentiment signals that continue to be of concern. When what appears to be extended market valuation is added into the mix, we believe the data and valuation are counterbalancing the bullish charts that cause us to have some hesitancy and maintain our near-term “neutral” outlook for the equity markets.

On the charts, the indexes closed mixed Friday with narrow but positive breadth on the NYSE and NASDAQ.

  • The (page 2), DJI (page 2), COMPQX (page 3) and NDX (page 3) made new closing highs while the DJT (page 4) closed above resistance to a new closing high as well.
  • The MID (page 4), RTY (page 5) and VALUA (page 5) closed lower on the day.
  • The net result is all the charts are now in near-term uptrends and lacking in sell signals.
  • And while breath narrowed in Friday’s trade, the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive and above their 50 DMAs.

However, as has been the case for a while, some of the data continues to suggest the markets could be vulnerable to some notable downside.

  • The 1-day McClellan OB/OS Oscillators are still neutral (All Exchange: +19.13 NYSE: +7.66 NASDAQ: +29.29).
  • However, the psychology data has turned some of its flashing yellow lights back on. The Open Insider Buy/Sell Ratio (page 9) dropped to 27.7 from 31.0 as insiders returned to the selling window. While it remains neutral it is quite close to a bearish reading should it drop below 25.0.
  • In sharp contrast, the leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator page 8), saw the leveraged ETF traders extending their leveraged long exposure from a neutral 0.87 to a bearish 1.24.
  • As we have noted several times in the past, while the Rydex/Insider action does not pinpoint tops, it has preceded important market corrections.
  • Additionally, last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) was little changed at a bearish 20.8/62.4 while the AAII Bear/Bull Ratio also saw little change at 23.43/43.53.
  • Meanwhile, valuation continues to appear extended.
  • The forward 12-month consensus earnings estimate from Bloomberg rose to $166.31 but leaves the SPX forward multiple 23.0 while the “rule of 20” finds fair value at 18.9. The SPX forward earnings yield is 4.35% with the Treasury yield rising to 1.011%.

In conclusion, while the charts remain positive, sentiment and data suggest the ice may be thinning under our feet. So, we remain “neutral” in our near-term outlook as stock picking is becoming more critical.

SPX: 3,695/NA

: 30,209/NA

COMPQX: 12,692/12,950

NDX: 12,650/NA

DJT: 12,533/NA

MID: 2,312/NA

RTY: 2,000/NA

VALUA: 7,825/NA

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