Forward SPX Estimates Drop Again
Opinion: There was little change for the indexes as they closed mixed on the day on slightly higher volume and negative internals. Their short term uptrends remain intact while the data is essentially neutral. However, the slide in forward 12 month earnings estimates for the SPX continues as they have been lowered yet again while sentiment continues to send warning signals. As such, although the charts remain intact, other evidence continues to suggest caution for the near and intermediate term, in our opinion.
- On the charts, the indexes closed mixed as noted above with the COMPQX (page 3) making a marginal new high. The DJT (page 3) closed on resistance but has yet to supersede it. Finally, the DJI (page 2) is at a channel top that has proven problematic over the past several months as subsequent action has seen some pullback from prior encounters. For the short term, the uptrends remain intact with all of the stochastic levels well into overbought territory but yet to yield bearish signals.
- On the data, all of the McClellan OB/OS Oscillators are neutral (NYSE:+27.03/+49.02 NASDAQ:+31.61/26.96) along with most of the put/call ratios. Sentiment remains problematic for us as the Rydex Ratio (contrary indicator) continues to show leveraged ETF traders at historic bullish extremes at 69.0 while insiders continue to exit positions with a bearish 8.1 Gambill Insider Buy/Sell Ratio.
- Finally, our concern regarding valuation persists as First Call has yet again lowered their forward 12 month earnings estimates for the SPX, this time from $122.19 to $121.98, yielding a 17.3 multiple on forward estimates and a decade high valuation. The steady decline in estimates over the past several weeks, in our view, will likely be expressed eventually in the markets, although they have managed to ignore the issue to date. Unless earnings no longer matter, when the music stops, we suspect it may be very difficult to find a chair. As such, we view the market risk at current levels exceeds potential reward by a significant degree and sufficient to keep us cautious for the near and intermediate term.
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- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.78% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $121.98 versus the 10 Year Treasury yield of 2.06%.
SPX: 2,063/???
DJI: 17,861/???
COMPQX: 4,813/???
DJT: 8,814/9,140
MID: 1,474/???
RUT: 1,190/???