SPX Forward 12 Month Earnings Estimates Decline Again
Opinion: All of the indexes closed lower yesterday with negative internals as volumes shrank. The result was a few more cracks in the charts while the data has turned more neutral in nature with the exception of sentiment and valuation which we view as negative. As we continue to see forward estimates for the SPX decline, our near to intermediate term outlook remains one of risk outweighing potential reward. As a side note, the oil ETF, USO, closed above its downtrend line and 50 DMA for the first time since last September suggesting a possible bottom in oil from a technical perspective.
- On the charts, all of the indexes closed lower with negative internals but on lighter volume. A few more chart issues arose as the DJI (page 2) held its short term uptrend line but closed below its 10 DMA as well as signaling a bearish stochastic crossover. The same can be said of the RUT (page 4).The COMPQX also closed below its 10 DMA but held its uptrend. As such, the action added a bit more cautionary tone to the charts.
- Also, as noted above, the oil ETF, USO, closed above its downtrend line and 50 DMA for the first time in several months. The technical implication is the possibility that oil may have made a bottom and is now in a consolidation phase.
- The data has turned more neutral including all of the McClellan OB/OS Oscillators (NYSE:-21.55/+47.86 NASDAQ:-10.43/+39.48). The WST Ratio and its Composite are also neutral (53.7/132.3) along with the Equity Put/Call Ratio at .61.
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- Sentiment is still a concern as the new Investors Intelligence Bear/Bull Ratio (contrary indicator) shows advisors persist in their historically extreme bullish outlook at 14.1/58.7 along with the Rydex Ratio (contrary indicator) at a historic high of bullish leveraged ETF traders at 70.2. The crowd continues to believe this tree will grow to the sky.
- Finally, valuation still appears stretched as First Call has lowered their forward 12 month earnings estimates for the SPX yet again, this time from $121.98 to $121.71. The result is the SPX continues to trade at its most expensive valuation, via this metric, in a decade at 17.2X forward earnings.
- In conclusion, the weight of the evidence continues to suggest caution for the near to intermediate term for the major indexes.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.8% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $121.71 versus the 10 Year Treasury yield of 2.12%.
SPX: 2,063/???
DJI: 17,861/???
COMPQX: 4,813/???
DJT: 8,877/9,236
MID: 1,474/???
RUT: 1,219/???