Most Index Charts Remain in This Trend

The bulk of the major equity indices closed higher Friday except for the DJIA posting a loss.

No violations of support/resistance/trend were registered, leaving all but the Dow Jones Transports and Value Line Arithmetic Index, which remain positive, in short-term neutral trends.

The Nasdaq 100 (see below) tested support while the MidCap 400 and Value Line index tested resistance.

Source: Worden

Breadth was positive on the day but left the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq neutral and above their 50-day moving averages.

Data

The one-day McClellan Overbought/Oversold Oscillators remain neutral (All Exchange: +15.0 NYSE: +18.01 Nasdaq: +13.21).

Psychology continues to be of some concern, though, as the Open Insider Buy/Sell Ratio dipped to a neutral 34.3 while the Rydex Ratio (contrarian indicator) remains bearish with the leveraged ETF traders extended in their leveraged long exposure lifting to a bearish 1.17.

Meanwhile, last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator) remains bearish at 21.2/56.6. New AAII and II Bear/Bull Ratios will be released Tuesday.

We continue to monitor the high levels of bullish opinions on the part of investment advisors and leveraged ETF traders as potential cautionary signals as they leave little room for disappointment on their part, in our view.

Valuation

The valuation gap remains extended with the S&P 500 trading at a P/E multiple of 22.2x consensus forward 12-month earnings estimates from Bloomberg of $156.13 per share, while the “rule of 20” finds fair value at 19.2x. This valuation extension has been present for the past several months.

The S&P’s forward earnings yield is 4.5% and the 10-year Treasury yield is at 0.84%.

Near-Term Outlook

We have yet to see enough evidence presented to alter our current near-term “neutral” outlook for the equity markets.

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