Cumulative Breadth Sees Modest Improvement
The major equity indexes closed mixed Tuesday with mixed internals on the NYSE, while the NASDAQ’s were positive. Trading volumes declined on both exchanges from the prior session with three of the popular indexes making more new closing highs as cumulative breadth saw some minor improvements. So, while the index short-term trends remain mixed, the bulk are positive and should be respected, in our opinion. However, we view the positive impact of trend on the scales as being counterbalanced by overvaluation and excessive bullish sentiment on the part of investment advisors. And while cumulative breadth saw some improvement, it remains questionable in our view. As such, we are maintaining our near-term “neutral” outlook for the equity markets at this time.
On the charts, the indexes closed mixed yesterday with the NYSE having slightly negative breadth and the NASDAQ having positive internals as trading volumes declined on both exchanges. The DJI (page 2), DJT (page 4), and MID (page 4) declined as the rest posted advances with the SPX (page 2), (page 3) and NDX (page 3) posting new closing highs yet again. The near-term trends remain neutral on the MID, RTY and VALUA with the rest bullish as cumulative breadth improved slightly with the All Exchange, NYSE and NASDAQ A/Ds now neutral and the NASDAQ’s back above its 50 DMA. Yet, while most of the trends remain bullish and should still be respected, we would note the heightened selectivity of market participants.
The data remains mixed. The 1-day McClellan OB/OS Oscillators remain neutral (All Exchange (-35.09) NYSE (-40.05) NASDAQ (-26.76) as is the Open Insider Buy/Sell Ratio (page 9) at 43.1. The detrended Rydex Ratio (contrary indicator page 8) is a mildly bearish 0.86 with the leveraged ETF traders slightly reducing their leveraged long exposure. This week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) at 16.5/59.2 increased its cautionary message as investment advisors increased their already overly bullish outlooks. We reflect on their extremely bearish outlook at the March lows. The counterintuitive % of SPX issues trading above their 50 DMAs (page 9) slipped to 74.8%. The valuation gap continues to appear extended with the SPX forward multiple at 23.6 via consensus forward 12-month earnings estimates from Bloomberg at $145.69 while the “rule of 20” finds fair value at 19.3. The valuation gap is at its widest point within the rally from the March lows. The SPX forward earnings yield is 4.25% with the 10 ten-year Treasury yield at 0.68%. We are watching the 10 Year closely for a possible technical upside breakout in yield.
In conclusion, our “neutral” outlook for the equity markets is unchanged. Breadth, psychology and valuation remain concerns despite the popular index gains.
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