Opinion: All of the indexes closed higher yesterday with several chart improvements. Internals were positive but volumes waned from the prior session. So although the charts are technically intact and may proceed higher, some warning signs are coming from the data as well as the index stochastic levels flashing some short term warning lights. Given their intensity, we would view the chart progress with some short term caution while valuation remains stretched for the intermediate term, in our view.
- On the charts, the SPX (page 2), DJI (page 2) and MID (page 4) all made new closing highs yesterday. The COMPX (page 3) closed above short term resistance along with the DJT (page 3) while the RUT (page 5) closed above resistance and its 50 DMA. So there were multiple bullish events on the charts.
- We are tempering our enthusiasm for the gains as all of the stochastic levels for the indexes, with the exception of the DJT, are now very overbought on their respective readings. They may well stay overbought and have yet to signal bearish reversals. However, they do imply some near term risk. We would also note the % of stocks in the SPX index trading above their 50 DMAs as the index has hit a new high is only 62.5% suggesting less than impressive breadth, in our opinion.
- On the data, the McClellan OB/OS Oscillators remain neutral (NYSE:+24.4/+2305 NASDAQ:+33.74/7.55). Warnings are coming from the OEX Put/Call Ratio (smart money) that shows the pros loading up heavily on puts at 2.92 as they expect some near term weakness. We would also note the OEX Open Interest is at a decade high. Over the last 10 years, the OEX OI has lifted above 1.70 7 times. In each case, the markets saw a retracement of some note. The current OEX OI stands at 2.83 and well above the 1.70 level. It is not a guarantee of weakness. However, its track record is worthy of some respect, in our view.
- The forward p/e for the SPX based on 12 month forward earnings estimates from IBES remains near a decade high of 17.1X leaving us still cautious for the intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.84% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $124.33 versus the U.S. 10-Year Treasury yield of 2.23%.
SPX: 2,095/???
DJI: 18,041/???
COMPQX; 5,002/???
DJT: 8,541/8,804
MID: 1,518/???
RUT: 1,206/1,263