Earlier this morning on Twitter, we highlighted that every major index ETF, small and large-cap alike, has pushed firmly into overbought territory in our Trend Analyzer with price sitting one standard deviation or more above their 50-DMAs.  While that could typically be taken as a sign of potential near term downside mean reversion to come, taking a look under the hood reveals that things may not be quite as overbought as they appear.

As shown in the trading range charts from our Daily Sector Snapshot included with the Morning Lineup and Closer, of the underlying sectors, some of the defensives, Real Estate (XLRE) and Utilities (XLU), are actually not overbought. Real Estate has not just become oversold but is nearly oversold to an extreme degree of two standard deviations below its 50-DMA.  While not quite there yet, Utilities is also on the verge of moving into oversold territory. Additionally, one of the more exposed sectors to trade, Industrials (XLI), has further upside as it too is only in neutral territory amidst the swarm of positive trade news. Of the rest of the sectors, conditions are still overbought by this measure with each one’s price over one standard deviation above their 50-DMAs.

Though sectors prices have gotten elevated relative to their 50-DMAs, the same is not entirely true for the individual stocks of each sector. As shown in the charts below, only a handful of sectors like Health Care and Consumer Staples currently have an elevated number of stocks above their 50-DMAs. Other sectors like Communication Services, Consumer Discretionary, Industrials, Materials, and Technology have seen other periods this year where a higher percentage of the sector’s stocks had been above the 50-DMA.  As for the Utilities and Real Estate sectors, only 35.7% and 31.25%, respectively, of stocks are above their 50-DMAs.  That is notable in that for the two sectors, the readings are in the 12th and 6th percentiles of all days over the past year, respectively. This all means that while many stocks have participated in the rally, there are still plenty that could benefit from the technical catalyst of a break above the 50-DMA.

Another measure of overbought/oversold levels and participation, the 10-Day Advance/Decline line, is also not showing any drastic readings. The 10-Day A/D line shows the average number of daily advancers minus decliners over the last ten days.  When this reading gets elevated, it’s usually a sign of near-term exhaustion for price.  That’s simply not the case right now even with most sector’s trading in overbought territory.  Start a two-week free trial to Bespoke Institutional to access all of Bespoke’s equity market research and interactive investor tools.

Positive developments on the trade front over the past couple of days have been a tailwind for the Technology sector, which has exposure via trade heavy industries like the semiconductors.  As the sector’s price has risen, so have valuations. Keeping track of valuations using our Daily Sector Snapshot included with the Morning Lineup and Closer, we have been repeatedly noting that the Technology sector has seen its price-to-earnings ratio consistently in the upper end of the past decade’s range recently.

In fact, with yesterday’s rally further elevating price, the P/E ratio is now in the 100th percentile of all readings of the past ten years. In other words, the 25.5 P/E yesterday was the highest of the past ten years. The last time the ratio was this high or higher was back on November 7th of 2007. Although the valuation is undoubtedly elevated now, the P/E ratio is actually still well off of its highs and only in the 68th percentile of all readings of the past 25 years.  As shown below in the chart of the sector’s P/E ratio over the past quarter-century, the current level has rarely been observed since the end of the Dot-Com Bubble.  But the ratio is also still well below levels seen during the bubble in the late 1990s.  Additionally, the build-up to current levels has been much more gradual than around that time. Simply put, while the sector’s valuation has run hot, it’s not even close to what we saw during the 90s heyday for Tech.  Click here to learn more about Bespoke and its research offering.

Although the survey would not have caught any sentiment changes as a result of equities’ rally today, the weekly investor sentiment survey from AAII rose this week to 37.63% after dropping to 31.72% last week.  That only brings it back up towards the levels from one month ago when bullish sentiment peaked just above 40%. While getting closer, this week was also the fourth in a row in which bullish sentiment was below its historical average of 38.07%.

The bulls’ gains were the bears’ loss as the percentage of investors reporting as pessimistic fell by over three percentage points.  Like bullish sentiment, bearish sentiment is also still below its historical average of 30.36% but by a wider margin.  Granted, this is not extended to any extreme degree as it is still well within one standard deviation of that average.  In other words, both bearish and bullish sentiment has shifted more positive but not by a significant amount.

Given the bull-bear spread is at its widest in a month, neutral sentiment has also pulled back in the past week falling to 36.32%. This comes after last week saw one of the higher readings for neutral sentiment this year. With bullish sentiment borrowing from the neutral camp, there is a higher percentage of investors reporting as bullish than either neutral or bearish for the third time in a month. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

Like the S&P 500 index itself, the Cumulative A/D line, which measures the net daily number of stocks in the index rising or falling, also hit a new high today.  For the last two years now, the cumulative A/D line has consistently either tracked or led the S&P 500 to new highs, and today’s new high is just the latest example.

With equities starting to fade into the lunch hour today after the President’s ‘VERY” impactful tweet on trade, we’ll be watching to see if the new highs in both price and breadth can hold into the close.  We would note, though, that breadth hasn’t seen as large of a pullback as price which is a bit encouraging.  Start a two-week free trial to Bespoke Institutional to access our 2020 Outlook Report, interactive tools, and much more.