As we begin a shortened trading week, we remain concerned for the near-term market outlook as the forward valuation for the S&P 500 continues to trade at a significant premium to ballpark fair value while insiders continue to be sellers.

As such, while we believe some very selective buying can be done, our overall outlook suggests more patience and caution are required before becoming active buyers in general.

Weak Session Leaves All Chart Trends Neutral

On the charts, the major equity indexes closed mostly in the red Friday except for the DJIA and Russell 2000 (see above) posting gains.

All closed near their session highs. However, there were no violations of trend or support, leaving all in near-term neutral patterns.

Cumulative market breadth did see some improvement with the advance/decline lines for the All Exchange, NYSE and Nasdaq turning neutral from bearish.

Meanwhile, all the stochastic readings are neutral and relatively non instructive regarding near-term market probabilities.

Keep an Eye on Insider Selling 

On the data dashboard, the 1-Day McClellan Overbought/Oversold Oscillators are mostly neutral with only the NYSE oversold while the All Exchange and Nasdaq remain neutral (All Exchange: -49.28 NYSE: -68.71 Nasdaq: -35.39).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) dropped to 62% and remains on a neutral signal.

In our opinion, the Open Insider Buy/Sell Ratio continues to be an issue as insiders increased their selling on the weakness, leaving this indicator on a bearish signal at 23.0. We repeat, we would prefer to see them as buyers of weakness.

The detrended Rydex Ratio (contrarian indicator) dipped to +0.08 and is neutral.

Last week’s AAII Bear/Bull Ratio (contrarian indicator) dropped to 1.01 as bearish sentiment declined and is also neutral.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) is neutral at 25.7/48.6.

Stretched Valuation Remain Cautionary

Valuation continues to be troubling. The forward 12-month consensus earnings estimates from Bloomberg for the S&P 500 slipped to $221.06 per share, and is still a problem as well as its P/E multiple of 18.5x remains at a significant premium to the “rule of 20” ballpark fair value of 16.2x. This valuation, in our opinion, leaves little margin for error for equities.

The S&P’s forward earnings yield is 5.42%.

The 10-Year Treasury yield closed lower at 3.83%. It is in a short-term uptrend with support at 3.72% and resistance at 3.88%, by our analysis.

Our Market Outlook

The charts, data and valuation continue to suggest some near-term caution regarding equity exposure is warranted until our analytic process suggests otherwise.

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