Internals Remain Weak
Opinion: Although yesterday’s action in the equity markets may appear somewhat uneventful on the surface, we are of the opinion that a look behind the proverbial curtain continues to suggest a continuing erosion of internal breadth that has the potential to ultimately be expressed in the major indexes. With valuation a bit stretched, we remain of the opinion that some caution is still warranted regarding the near term prospects for the major equity indexes.
- On the charts, more cracks appeared in spite of what seemed to be a rather uneventful session. While the SPX closed flat and the DJI closed higher on the day, market internals were negative as down volume surpassed up volume, decliners easily outnumbered advances and overall volume increased. The SPX (page 2) bounced off of its trend line but is on a bearish stochastic crossover as are the DJI and DJT. The DJI (page 2) held support and its uptrend line after intraday violations.
- However, the DJT (page 3) closed below its uptrend line that had held in place since the middle of last April. As we have viewed the DJT as the leading index, this break becomes more significant, in our opinion. The DJT could just trade sideways but the break of trend is a warning. The RUT (page 4) bounced off of support but closed below its 200 DMA as well as its 50. The MID (page 4) also bounced at support but closed below its 50 DMA as well. Meanwhile, the NASDAQ A/D is still declining with a lower high and lower low. As well, the SPX at the beginning of June had 164 new 12 week highs. The SPX is now higher but the new 12 week highs have slid to 73 showing deterioration there as well.
- Regarding valuation, the forward 12 month earnings estimates of $126.21 for the SPX by First Call results in a 15.7 forward multiple. This is its highest reading in a decade and near levels preceding other corrections.
- In conclusion, as internals continue to deteriorate and forward valuation a bit stretched, we remain of the opinion that there is little room for error and some caution should be exercised.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.38 forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.21 versus the 10 Year Treasury yield of 2.49%.
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