Short Term Outlook Remains “Neutral/Positive”
Opinion: All of the indexes closed higher Friday with positive internals as volumes declined from the prior session. All closed at or near their intraday highs. More technical improvements were registered as more index resistance levels were violated on a closing basis. The data remains largely neutral while “crowd” sentiment appears to view the rally with a great deal of disbelief. As such, we remain “neutral/positive” for the near term. The intermediate term remains “neutral/positive” as well, due to much improved breadth. However, valuation is once again becoming a concern.
- On the charts, all of the indexes closed higher Friday with good internals. Near term resistance levels were violated on a closing basis on the COMPQX (page 3), MID (page 4) and RUT (page 4). The DJT (page 3) closed above its 200 DMA. All near term uptrend lines remain intact. The only chart issue at the moment, in our opinion, is the stochastic levels that are now quite overbought on all but the DJT. However, as noted in past comments, said stochastic levels can remain overbought for extended periods. The data appears to be balancing those scales.
- On the data front, all but the 1 day NASDAQ McClellan OB/OS Oscillators remain neutral. The NASDAQ 1 day is +58.16, not a particularly onerous level. What we find of particular interest is the apparent disbelief on the part of the “crowd” regarding the recent rally. The recent AAII Bear/Bull Ratio (contrary indicator) of 29.39/17.75 shows bears well outweighing bulls while the bullish reading is particularly anemic. As well, leverage in the system continues to drop, now down 12% on a year to year comparison. And while insider buying has declined, the Gambill Insider Buy/Sell Ratio is a neutral 16.3. The OEX Put/Call Ratio (smart money) at 0.6 finds the pros long calls and looking for more strength.
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- In conclusion, both the charts and data continue to suggest to us a “neutral/positive” outlook is appropriate for the short and intermediate term. However, valuation is becoming stretched again at a 16.9 forward 12 month multiple for the SPX.
- Forward 12 month earnings estimates for the SPX from IBES of $124.52 leave a 5.93% forward earnings yield on a 16.9 forward multiple.
SPX: 2,057/2,100
DJI: 17,527/17,922
COMPQX; 4,820/4,972
DJT: 7,476/7,823
MID: 1,453/1,493
RUT: 1,119/1,169
VALUA: 4,519/4,665