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S&P 500 Is at Fair Value as Insiders Sell

More new closing highs have been generated on the charts of the major equity indices while some data has turned more cautionary and the S&P 500 has essentially erased its previous gap versus fair value.

On the Charts

The bulk of the indices closed higher Friday with the one exception being the Dow Jones Transports posting a loss.

Internals were positive but volumes were notably lower than those of Thursday's session.

The S&P 500, DJIA, Nasdaq Composite and Nasdaq 100 made new closing highs.

The near-term uptrends remain positive on all but the Russell 2000, which is neutral.

While no sell signals have been generated on the price charts, all but the Dow Transports (see below), which gave a bearish stochastic crossover signal Thursday, remain overbought on that metric while the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq have turned neutral from positive.

The VIX closed at its lowest level over the past 12 months, suggesting the potential for a return of volatility that it signaled three times over the same time period while the price charts are extended above their 50-day moving averages.

So, while the trends are positive, other chart components are suggesting some caution is warranted.


The data is a bit more mixed.

All of the one-day McClellan Overbought/Oversold Oscillators are neutral (All Exchange:+5.75 NYSE:-9.05 Nasdaq:+18.96) while all of the 21-day readings remain overbought.

The detrended Rydex Ratio (contrary indicator) is neutral at +0.55 while last Tuesday's AAII Bear/Bull Ratio (contrary indicators) turned neutral at 29.0/34.0.

The Investor's Intelligence Bear/Bull Ratio (contrary indicator), however, is notably bearish at 16.8/55.1, suggesting an excess of bullish sentiment/complacency on the part of investment advisors we think worthy of note.

The percentage of S&P 500 stocks trading above their 50-day moving averages is a neutral 65.5%.

However, the Open Insider Buy/Sell Ratio dipped to 25.9, which is a hair's breadth from turning bearish. It suggests insiders have become relatively active sellers into the recent rally.


Valuation is now essentially at fair value with forward 12-month earnings estimates for the S&P 500 at $172.31 per share via Bloomberg, leaving the forward P/E multiple at 18.0x while the "rule of twenty" finds fair value at 18.1x.

The 10-year Treasury yield is 1.93% and the earnings yield is 5.57%.

Our Outlook

While we typically defer to the price charts as our primary prognosticator, we believe that the overall picture is one of an elevation of risk, thus causing us to maintain our near-term "neutral" outlook for the major equity indices.

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