SPX Forward 12 Month EPS Estimates Fall Further
Opinion: Yesterday proved to be quite a negative day for the indexes as all declined notably on very negative breadth and heavy volume. The charts suffered and are now, in our opinion, showing signs of potentially important tops while sentiment appears to remain unfazed and forward earnings estimates for the SPX continue to slide. As such we remain cautious for the intermediate term while the short term picture has taken on a darker tone.
- On the charts, all of the indexes closed notably lower and at their lows of the day on heavy volume. The SPX (page 2), DJI (page 2) and DJT (page 3) all closed below their respective support levels while both the COMPQX (page 3) and RUT (page 4) closed below their 50 DMAs.
- Over the past several days, we have been viewing what we suspected may prove to be possible topping formations for some of the indexes. We are now of the opinion that those possibilities have increased as we now suspect the SPX, DJI, COMPQX and DJT may be forming “Head & Shoulders” topping formations as described on the charts below. If our suspicions prove out, the DJI may have signaled a break by closing below its “neckline” yesterday implying an eventual move to 16,500. The SPX has not signaled yet. However, should it do so, it would imply a move to 1,890. As such, the charts, in our opinion, imply heightening levels of risk for the indexes.
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- Some of the data appears to support the concerns on the charts. Most of the McClellan OB/OS Oscillators remain neutral (NYSE:-12.19/-4.42 NASDAQ:-42.4/-58.09) with only the 21 day NASDAQ somewhat oversold at -58.09. As such, no important oversold conditions exist. While the Rydex Ratio (contrary indicator) shows the leveraged ETF traders as starting to sweat, as it has dropped from 67.7 to 55.9, they still remain heavily leveraged long and nowhere near capitulation levels. Meanwhile, the new Investors Intelligence Bear/Bull Ratio (contrary indicator) shows advisors continue to be overly optimistic at 16.3/53.1. They have yet to show any signs of concern.
- Finally, the forward earnings estimates for the SPX from First Call have slid even further. They now stand at $123.57 versus the prior cut to $124.62 leaving the forward 12 month p/e at 16.2X and at the top end of its decade long range.
- In conclusion, we are of the opinion that there is evidence mounting suggesting risk levels for the equity markets has elevated for the near and intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.17% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.57 versus the 10 Year Treasury yield of 1.72%.
SPX: 1,992/2/063
DJI: 17,062/17,639
COMPQX: 4,600/4,771
DJT: 8,687/8,978
MID: 1,437/1,472
RUT: 1,154/1,199