Where’s the Market Headed Next After New All-Time Highs?

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Every major equity index managed to post a new all-time closing high Friday and all are now in near-term uptrends and lacking sell signals.

Yet while we are unwilling to fight the current bullish trends, psychology and valuation data remain cautionary, suggesting potential for some market vulnerability. Also, McClellan oscillators are back in overbought territory suggesting a possible pause of recent strength.

Therefore, while there are individual names that are not overvalued or extended in price, the stalemate between positive trends and cautionary data continues.

On the Charts

All the major equity indices closed higher Friday and near their intraday highs as all posted new all-time closing highs.

The strength has now shifted all the charts into near-term bullish trends as overall market breadth remains positive for the All Exchange, NYSE and Nasdaq.

We have yet to see any sell signals of note generated on the charts, which suggests the current bullish trends should continue to be respected.

Data

Data are still suggesting investors should keep their enthusiasm at rational levels.

The one-day McClellan Overbought/Oversold Oscillators are back in overbought territory after Friday’s strength, suggesting a possible pause of the recent rally (All Exchange: +73.67 NYSE: +80.96 Nasdaq: +67.15).

The All-Exchange McClellan ratio adjusted 1-day OB/OS Oscillator is +73.67 (bearish) and 21 day +11.98 (very bearish).

The Open Insider Buy/Sell Ratio up ticked slightly to a neutral 30.3. However, the past few weeks have found them largely executing sell versus buy transactions.

The detrended Rydex Ratio (contrarian indicator) remains bearish at 1.46 with the leveraged ETF traders very leveraged long.

Last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator) saw another decline in bearish advisors as bullish sentiment increased and remains in bearish territory at 17.2/64.6.

We reiterate our concern that investor sentiment is seeing a dangerous level of bullish expectations.

S&P 500 Valuation

The valuation gap is a concern. It remains extended with the S&P 500 trading at a P/E multiple of 23.1x consensus forward 12-month earnings estimates from Bloomberg of $159.93 per share while the “rule of 20” finds fair value at 19.0x.

We believe sentiment and valuation suggest a high level of risk exists in the markets.

The S&P’s forward earnings yield is 4.32% with the 10-year Treasury yield lifting to 0.97%.

Near-Term Outlook

The charts remain positive and suggest their trends should not be fought. However, sentiment and valuation are not to be ignored. Thus, we are maintaining our near-term “neutral” outlook for the equity markets in general.

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