Fear and Valuation Battle It Out in a Classic Market Tug of War

The tug-of-war between the market’s extended valuation and high levels of crowd fear persists. Indeed, these indicators appear to be counterbalancing each other, as we detail below.

All the major equity indexes closed near their session highs Thursday with a couple of technical improvements. Nonetheless, the near-term chart trends were unfazed, leaving them in a mix of bullish, bearish and neutral projections. Cumulative market breadth saw some slight improvement while the bulk of the data remain neutral and lacking any strong near-term market probabilities.

We believe that buying should continue to be done on a very selective basis as market breadth could use some needed improvement.

All Indexes Advance With Trends Unchanged

Chart Source: Bloomberg

On the charts, all the major equity indexes closed higher Thursday with positive internals on lighter trade.

All closed near their session highs with the Value Line Arithmetic Index closing above resistance while the Russell 2000 (see above) reclaimed its 50-day moving average.

However, the strength had no impact on the near-term trends that remain bullish for the S&P 500, Nasdaq Composite and Nasdaq 100 while the Russell is neutral and the rest still in near-term downtrends.

Selectivity of participation persists.

The cumulative advance/decline lines for the All Exchange NYSE and Nasdaq are all neutral.

No stochastic signals were generated.

Data Stay Neutral

The data dashboard remains largely neutral and still lacks any high probability movement signals for the near-term.

The 1-day McClellan Overbought/Oversold Oscillators are still neutral, despite the gains (All Exchange: +14.39 NYSE: +10.73 Nasdaq: +17.16).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) stayed neutral, rising to 35%.

The Open Insider Buy/Sell Ratio rose to 72.5 as insiders continued show some interest in buying their stock. Yet, it also remains neutral.

The detrended Rydex Ratio (contrarian indicator) rose to +0.41, also staying neutral.

This week’s AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.51 and remains just inside very bullish territory. In our view, it remains encouraging, but a bit less so.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) is still neutral at 23.9/46.5%.

Valuation Spread Remains Wide

The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 saw a lift to $223.06 per share. However, the valuation gap remains wide and is still disconcerting with the S&P’s forward P/E multiple at 18.9x versus the “rule of 20” ballpark fair value of 16.4x, suggesting valuation is extended.

The S&P’s forward earnings yield is 5.28%.

The 10-Year Treasury yield closed lower at 3.61%. It is short-term neutral with support at 3.56% and resistance at 3.81%.

Bottom Line

While some of the indexes are still in uptrends, the number of stocks participating remains very selective as the charts and market breadth could stand some improvement. As well, extended valuation is concern. However, the high level of crowd fear is somewhat of a counterbalance, in our view. Thus, we remain of the opinion that any buying should be done on a highly selective basis.