Data Tips Slightly More Cautionary
Opinion
All of the indexes closed lower yesterday with negative internals as volumes rose on the NASDAQ but shrank on the NYSE. Some potentially negative signals were produced on the charts while the data has turned a bit more cautionary, in our opinion. As such, with sentiment and valuation remaining an issue, we continue to be of the opinion that risk outweighs potential reward for the near and intermediate term for the indexes.
- On the charts, all of the indexes closed lower yesterday yielding a few yellow warning lights on the charts. The SPX (page 2) closed back below its short term uptrend line while triggering a bearish stochastic crossover signal and closing fractionally below its 10 DMA for the first time in a month. The DJT (page 3) remains on a bearish stochastic crossover while also closing below its 10 DMA. As the other indexes made new highs recently, the DJT was never able to overcome resistance. The MID (page 4) also closed below its 10 DMA and its short term uptrend line while also triggering a bearish stochastic crossover signal. As such, although these events are not what we would consider to be major in nature, as a whole we view them as suggestive of a weakening trend.
- Looking at the data, while the 1 day McClellan OB/OS Oscillators are neutral (NYSE:+0.44 NASDAQ:+4.85) both of the 21 day levels are now overbought (NYSE:+68.33 NASDAQ:+52.91). The OEX Put/Call Ratio (smart money) remains bearish at 1.93 as the pros continue to expect further weakness. In contrast, the Rydex Ratio (contrary indicator) reveals the leveraged ETF traders remain excessively bullish at 70.0. As well, the WST Ratio and its Composite are bearish at 73.1 and 151.1 respectively. The data has turned a bit darker.
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- We still view valuation as extended as the forward p/e based on 12 month forward earnings estimates form First Call remains at a decade high of 17.3X.
- In conclusion, we believe a bit more weight has been added to the scales implying the recent market strength is waning with enough evidence to suggest risk versus reward remains relatively high for the near to intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.79% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $121.98 versus the U.S. 10-Year yield of 2.12%.
- S&P 500: 2,063/?
- Dow Jones 30: 17,861/?
- NASDAQ; 4,813/?
- Dow Jones Transportation: 8,877/9,236
- S&P Midcap 400: 1,474/?
- Russell: 1,219/?