DJT At Channel Top
Opinion
All of the indexes continued to grind higher yesterday on positive breadth and volume. As such, we still have yet to see sell signals generated on the charts in spite of our opinion regarding investor sentiment and valuations being stretched to cautionary levels. So, until such technical chart signals appear, the current uptrends are intact and should be respected.
- On the charts, all of the indexes advanced yesterday on positive internals. The SPX (page 2), DJI (page 2) and DJT (page 3) all made new closing highs and were finally joined by the MID (page 4) making a new closing high as well. The COMPQX (page 3) made a new 14 year closing high while the RUT (page 4) remains confined in its current trading range. So we have yet to see any sell signals suggesting a change in trend. We would note the DJT is at the top of its trading channel that has functioned as a stalling point since June. However, unless there is a break of support on the DJT, its trend remains up.
- As all will know, the sentiment and valuation data continue to be a concern for us as the “crowd” (contrary indicator) is at peak historical levels of bullish sentiment while the forward P/E for the SPX based on forward 12 month IBES earnings estimates is at a decade high of 16.1X. These data points imply elevated risk, in our opinion. Yet we would note sentiment and valuation can stay at extremes for extended periods before the charts actually react by moving lower. As such, until the charts send such sell signals, the upward progress of the indexes may well continue.
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- In conclusion, there are no chart signals suggesting a change of the current uptrend for the indexes at this point in time. However, sentiment and valuation suggest to us there is sufficient reason to exercise some caution in playing the current rally.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.19% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.82 versus the 10 Year Treasury yield of 2.31%.
- S&P 500: 2,030/?
- Dow 30: 17,609/?
- NASDAQ Composite: 4,654/?
- Dow Jones Transportation: 8,963/?
- S&P Midcap 400: 1,420/?
- Russell 2000: 1,155/1,186