Chart trends appear to rule.
For the past several weeks, we have been stressing our concerns on market risk considering high valuations, margin debt levels and investment advisor complacency. Nonetheless, the indices have marched higher.
So while our concerns remain, the charts and data suggest we may be ahead of the curve. Unless and until there is a shift in the trends to the negative, the current mix of neutral and positive trends are likely to persist.
All of the indices closed higher Wednesday with broadly positive internals. Volumes rose on the NYSE and Nasdaq from the prior session. Multiple positive technical events occurred on the charts while the data remains fairly benign with only a few yellow flags.
The S&P 500, Dow Jones Industrials and Nasdaq Composite all closed above their near-term resistance levels. Both the Dow Industrials and Dow Transports made new closing highs and are in short-term uptrends while the S&P and Nasdaq finished above their short-term downtrend lines.
The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are now positive and above their 50-day moving averages as well. As such, the charts are clear of any near-term sell signals at this stage.
The trends should be respected until proven otherwise.
The data remains largely neutral, including all of the McClellan OB/OS Oscillators (All Exchange:22.7/+24.67 NYSE:+22.77/+37.79 NASDAQ:+22.66/+13.3), the Equity and Total Put/Call Ratios (0.6/0.71) and Open Insider Buy/Sell Ratio (46.4). A caution signal is being given by the OEX Put/Call Ratio as the pros loaded up on puts to a very bearish 2.0. Still, we would note the prescience of this indicator has diminished notably over the past several months.
The new Investors Intelligence Bear/Bull Ratio still shows investment advisors quite complacent at 18.8/52.5 while the use of margin is up 19.7% year to year. The forward valuation of the SPX is at an 18.2x multiple, just shy of a 15-year market peak, while the U.S. stock market total valuation is now 1.3 times U.S. GDP (only seen in late 1999 and early 2007).