Insiders Selling Into Strength
The bulk of the major equity indexes closed lower Wednesday with negative internals on the NSYE and NASDAQ as overall trading volumes increased from those of the prior session. The one exception was the SPX posting a fractional gain. However, all of the near term uptrends remain intact. The data is showing some minor adjusting, in both directions but remains generally neutral in its forecast. As stated previously, while the charts remain positive, the VIX, stochastic levels, investment advisor psychology and narrowing of the valuation gap suggest enough potential risk to maintain our near term “neutral” outlook for the major equity indexes at this time.
On the charts, the bulk of the indexes closed lower Wednesday with the exception of the SPX posting a fractional gain.
· Internals were negative on the NYSE and NASDAQ as trading volumes intensified from the previous session.
· However, no technical events of note were generated on the charts, leaving all in their near term uptrends.
· Yet while the charts continue to suggest a positive outlook, we are loathe to ignore the VIX at levels seen prior to corrections three times over the past 12 months as the stochastic levels remain overbought as well.
· Both of those data points can stay in those conditions for extended periods as the charts move north. The fact that when the shifts have occurred, leaving very little time to react, it is our opinion that a proactive approach may prove prescient, thus muting the chart enthusiasm. Downdrafts have been sudden and sharp.
The data is generally neutral including all of the 1-day McClellan OB/OS Oscillators (All Exchange:+12.8 NYSE:+2.76 NASDAQ:+20.91) while all of the 21 day readings are overbought.
· The detrended Rydex Ratio (contrary indicator) is back to neutral at +0.49 while Tuesday’s AAII Bear/Bull Ratio (contrary indicators) turned neutral at 29.0/34.0.
· The Investor’s Intelligence Bear/Bull Ratio (contrary indicator) is notably bearish at 16.8/55.1, suggesting an excess of bullish sentiment/complacency on the part of investment advisors we think worthy of note.
· The % of SPX stocks trading above their 50 DMAs is a neutral 67.1%.
· And while the Open Insider Buy/Sell Ratio remains neutral at 28.2, it is nearing a bearish signal as they have increased their selling activity into recent market strength.
· Valuation is closer to fair value with forward 12-month earnings estimates for the SPX at $172.40 via Bloomberg, leaving the forward p/e at a 17.9 multiple while the “rule of twenty” finds fair value at 18.2.
· The 10-Year Treasury yield stands at 1.81%.
· The earnings yield is 5.6%.
In conclusion, while we would normally be more constructive in our outlook, the VIX, stochastic levels, valuation and advisor psychology data suggest some degree of caution may be appropriate, thus causing us to maintain our near term “neutral” outlook.