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McClellan 1-Day OB/OS Oscillators Overbought but Rydex Ratio Very Bullish

All the major equity indexes closed higher Friday with positive internals on the NYSE and NASDAQ as all closed near their highs of the session. The buying pressure was strong enough to push all but one of the indexes above resistance, turning their near-term trends to bullish from neutral, by our work, with only one outlier. Market breadth improved as well, while another bullish stochastic crossover signal was generated.

The data is somewhat evenly balanced. The McClellan 1-day OB/OS Oscillators are overbought. However, there is the counterbalancing factor of the Detrended Rydex Ratio (contrary indicator) still finding the leveraged ETF traders heavily leveraged short and on the wrong side of the trade. As forward valuation for the SPX has moved more in line with fair value, we suspect some slowing of recent progress, although the overall market tone has improved, in our opinion. We will look for higher lows on any consolidation.

On the charts, all the major equity indexes saw notable gains Friday on very heavy trading volume.

  • Only the MID was unable to violate resistance.
  • As such, all the charts, except for the MID, turned near-term bullish from neutral with the MID staying neutral.
  • Cumulative market breadth also improved, staying positive on the All Exchange and .
  • The bullish stochastic crossovers that presaged last week’s gains saw one more generated, this time by the VALUA.
  • What we will now be watching for is higher lows to be registered on the charts during the next consolidation. Should that occur, we would be more confident in progress continuing.

Regarding the data, the McClellan OB/OS Oscillators are now overbought (All Exchange: +57.7 NYSE: +53.2 NASDAQ: +63.0).

  • The % of issues trading above their 50 DMAs (contrarian indicator) rose to 22%, and approaching the 25% trigger line, remaining bullish.
  • The Open Insider Buy/Sell Ratio dipped to 71.7 as insiders backed off somewhat from their recent buying, staying neutral.
  • On the other hand, the detrended Rydex Ratio remains very bullish -2.21 as the leveraged ETF traders continue to be highly leveraged short and represent pent up demand.
  • Last week’s AAII Bear/Bull Ratio (contrarian indicator) remained very bullish at 1.97 (page 8) as the crowd stayed fearful.
  • The Investors Intelligence Bear/Bull Ratio (contrary indicator) also stayed on a very bullish signal and still near a decade peak of fear at 42.7/29.4. As noted previously, such extreme levels of investor fear have typically presaged notable market rallies.
  • The forward 12-month consensus earnings estimate from Bloomberg for the SPX slipped to $236.24. As such, the SPX forward multiple is 16.6 and nearing the “rule of 20” ballpark fair value at 16.9.
  • The SPX forward earnings yield is 6.04%.
  • The closed higher at 3.13%. We view support as 3.0% and new resistance at 3.51%.

In conclusion, Friday’s robust gains on heavy volume were helpful from a technical view regarding near-term market prospects. With the crowd remaining terrified, we believe further progress is possible. However, some near-term consolidation registering higher lows for the indexes would add to that outlook’s credibility.

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