After two decent up days, the market decided to take a rest. While the daily chart of the major averages shows them flat-lining, intraday action was anything but dull. The elevated VWAPs on both the positive and negative sides combined with the large intra-day swing in the VIX reflects today's seesaw action between the bulls and the bears. There are some good and bad points to this market, both on the technical and fundamental sides:
1. The Dow Transport Index (DTX), a leader in determining market direction, is showing signs of forming a downward trending channel. If the index can't manage to close above today's high (917.7 on my chart; 9177 on other charts), a roll-over in the overall market becomes a higher probability scenario.
2. Today's Trin (Arm's Index) rose to top out at 1.4 before closing around 1.2. Values above 1.1 are considered bearish while values in the 1.5 or above area are considered to be bearish contrarian. We were near this contrarian level today meaning we could possibly see the market move to the upside tomorrow. Of course, what happens on the open is going to be determined in part by the jobs report due before tomorrow's bell.
3. The current P/E ratio of the S&P 500 sits at 20. That's 33% above its historical norm. Anyone who believes in the mean-reversion theory should be getting nervous. However, the real question is not if the market will revert back to its historical level it's when will it do so? Remember, the market can remain irrational for longer than you, the investor, can remain solvent.
So, what's the take-away from all this? My interpretation is that the market is showing us that Wall Street is becoming uneasy with the high market valuation and unless economic indicators continue to show increasing growth (and increasing wages), we could see investors move to the sidelines (which appears to be happening already). The moral of the story is to batten down the hatches and tighten up your stops!