Markets Appear More Vulnerable to Profit Taking Though Charts Remain Bullish

The major equity indexes closed mixed Tuesday, with positive New York Stock Exchange internals while those of the Nasdaq were negative as both exchanges saw higher trading volumes. Only one technical event occurred, with one index closing above resistance.

While the near-term bullish trends on all the charts should be respected, the markets are now a bit vulnerable to some profit taking after the sizable rally from the June lows in light of signals on the data dashboard as valuation is now somewhat stretched versus the S&P 500 trading at a discount to ballpark fair value at the June lows. We remain of the opinion that there is a likelihood that better buying opportunities may present themselves over the relatively near term. 

Checking Out the Charts

The major equity indexes closed mixed yesterday with positive NYSE and negative Nasdaq internals.

The Nasdaq Composite, the Nasdaq 100 and Russell 2000 closed lower as the rest posted gains with the S&P Midcap 400 Index (chart below) closing above near-term resistance. 

So, all the near-term chart trends remain bullish while market cumulative breadth for the All Exchange, NYSE and Nasdaq remain positive as well.

As has been the case over the past several sessions, the stochastic readings remain overbought but have yet to yield bearish crossover signals.

Diving Into the Data

The data is causing some concern now that substantial gains have been achieved from the June lows.

The McClellan Overbought/Oversold Oscillators remain cautionary as all remain overbought, but less so than yesterday’s readings (All Exchange: +67.54 NYSE: +76.11 Nasdaq: +63.3). We remain of the opinion that they suggest some short-term caution is warranted.

The percentage of S&P 500 issues trading above their 50-day moving average (contrarian indicator) remains bearish territory at 91%. We reiterate, as a point of reference, it was around 13% at the June market lows.

The Open Insider Buy/Sell Ratio dipped to 35.9 but remains neutral.

The detrended Rydex Ratio (contrarian indicator) ticked up to -0.34 and is neutral as well.

This week’s AAII Bear/Bull Ratio (contrarian indicator) moderated further as the crowd became a bit less fearful at 1.28, staying on a bullish.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) also moderated with the number of bears dropping and bulls increasing at 27.8/44.4. Its three-week moving average remains bullish at 83.79. 

S&P 500 Valuation and Yields 

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 finally saw an uptick to $233.32. However, the valuation spread has widened, with the S&P 500 forward multiple at 18.5 and at a premium to the “rule of 20” ballpark fair value at 17.2.

The S&P 500 forward earnings yield is 5.42%.

The 10-year Treasury yield closed higher at 2.82% and still within its trading range, with support at 2.72% and resistance at 2.91%.

The Near-Term Outlook

We would note the Dow Jones Industrials are up more than 4,000 points from the June low with the McClellan Overbought/Oversold cautionary as valuation has become somewhat stretched. In our view, they continue to suggest that patience should be exercised currently within the ongoing uptrends.

Leave a Reply

Your email address will not be published. Required fields are marked *