While the charts of the major equity indices remain a mix of bullish and neutral trends, the data remain generally neutral with some further improvement in the Insider/Rydex dynamic that we view as a positive.
Some new closing highs were achieved, once again, on negative breadth. Therefore, the selectivity of market participants during advances has reappeared and is once again of some concern to us.
As such, while the charts and data are somewhat nonthreatening at this point in time, the deterioration of market breadth may suggest a weakening internal structure.
On the Charts
Source: Worden
The major equity indices closed mixed Friday with negative internals on the NYSE and Nasdaq. As they closed at varying points within their intraday ranges, the S&P 500 and DJIA were at new closing highs while the Dow Jones Transports closed above resistance.
No changes in near-term trend occurred, leaving all in near-term uptrends except for the Nasdaq Composite and Value Line Arithmetic Index staying neutral.
Market breadth did see some deterioration as the Nasdaq cumulative advance/decline line turned negative and below its 50-day moving average. As noted above, market advances on negative breadth are, in our view, less than optimal and implies a potential weakening of internal stability. The All-Exchange A/D is neutral with the NYSE A/D positive.
No stochastic signals were generated.
Market Data
The data continues to send a generally neutral message.
All the McClellan 1-Day Overbought/Oversold oscillators remain in neutral territory (All Exchange: -5.86 NYSE: +10.07 Nasdaq: -17.26).
The Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, dipped a bit further to 0.77, remaining neutral, as they pulled back further on their leveraged long exposure.
In contrast, the Open Insider Buy/Sell Ratio lifted to 41.4 as insiders did some buying, but remains in its neutral range. It has been our experience that when the leveraged ETF traders are becoming more cautious as insiders step up their buying activity, concerns regarding investor complacency diminish.
Last week's contrarian AAII bear/bull ratio (28.8/34.29) and Investors Intelligence Bear/Bull Ratio at 16.3/54.1 (contrary indicator) saw little movement, leaving the AAII neutral and the II bearish.
Market Valuation and Yields
The forward 12-month consensus earnings estimate from Bloomberg dipped slightly to $205.34 per share. As such, the S&P's forward P/E multiple is 21.8x with the "rule of 20" finding fair value at approximately 18.7x.
The S&P's forward earnings yield is 4.6%.
The 10-year Treasury yield declined to 1.3%. We view resistance as 1.4% with support at 1.23%. We reiterate the recent shift of the 10-year yield into a higher trading range could cause some issues for the markets.
Near-Term Outlook
While the charts and data remain encouraging, the decline in market breadth may prove to be a precursor to some market volatility while the 10-year Treasury yield continues to be monitored closely.
