SPX Forward Earnings Estimates Rise
Opinion
After a weeklong hiatus, our review of the charts and data suggest the near term outlook for the major equity indexes to be neutral to positive in nature. There were some very important chart developments in our absence suggesting near term bottoms having been created while the data is mostly neutral with the exception of some improvement in sentiment.
· On the charts, we feel the most noteworthy events took place last Wednesday, the 15th, when both the Nasdaq (page 3) and RUT (page 4) created what we believe to be “hammer bottom” formations. After the drubbing of the prior 3 sessions, both indexes dove notably lower on the 15th on volume only to see all of the losses reversed and closing up on the day on heavy volume. We interpret this action as being the washout of seller supply from the decline of the prior 4 weeks with buyers finally entering with enough demand sufficient to reverse the process. Both indexes remain in their short term downtrends that have yet to be reversed. However, the hammers just noted give is reason to suspect we have seen the worst of the prior correction.
· We would also note the S&P 500 and Dow 30 (page 2) are very close to their near term resistance levels having suffered much less damage than the COMPQX and RUT while the DJT closed above resistance on Thursday. As such, although the COMPQX and RUT have a great deal of overhead resistance to contend with versus the SPX and DJI, we are of the opinion the storm has passed on the charts for the near term.
· Looking at the data, the vast majority of it is neutral, including the McClellan OB/OS Oscillators (NYSE:+21.47/+46.17 NASDAQ:+1.12/-47.73), with one exception. The AAII Bear/Bull Ratio (contrary indicator) turned bullish last Thursday as both the 1 and 3 week data show bears outnumbering bulls (34.25/27.22 31.72/30.35) as complacency finally turned to fear. As well, First Call now shows analyst forward 12 month earnings estimates rising for the SPX from $118.30 to $122.06.
· For the longer term, we remain bullish on equities as they remain undervalued with a 6.55% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $122.06 versus the 10 Year Treasury yield of 2.72%.
- SPX: 1,829/1,870
- DJI: 16,105/16,464
- NASDAQ: 4,050/4,175
- DJT: 7,407/7,649
- MID: 1,336/1,370
- RUT: 1,111/1,150