Opinion: Most of the indexes closed lower yesterday with negative internals and heavier trading volume while the DJI made a new closing high. The internals continue to display what we perceive as an ongoing pattern of institutional distribution. As most of the data is unavailable this morning, we will focus on the charts that continue to pursue their short term uptrends but are now quite overbought on their stochastic levels suggesting a pause/retracement of the recent rally. We remain cautious for the intermediate term due to valuation.
- On the charts, only the DJI (page 2) managed to close higher yesterday as it made a new marginal closing high. The rest of the indexes declined with the worst performance coming once again from the DJT (page 3) as it tested resistance, failed and closed near its lows of the day. At this time, its intermediate term downtrend remains intact and continues to be a cautionary message for the rest of the market, in our opinion.
- Volumes increased with negative internals continuing a pattern of what we believe to be institutional distribution. We remain of the opinion that the large cap indexes are masking the broader deterioration of the rest of the market. This erosion of breadth suggests to us a myopic movement of money to the large cap indexes. Such activity is usually seen in the final stages of a bull market.
- Although they have yet to make a bearish signal, the stochastic levels for all of the indexes are very overbought with the exception of the DJT. As previously noted, they can stay overbought for extended periods. However, they do suggest the potential for elevated near term risk.
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- Valuation remains an intermediate term concern with the forward p/e for the SPX based on 12 month forward earnings estimates from IBES remains at a decade high of 17.1X.
- 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 2.26%.
SPX: 2,115/???
DJI: 18,041/???
COMPX ; 5,015/???
DJT: 8,541/8,769
MID: 1,525/???
RUT: 1,239/1,263