OEX Put/Call Ratio Bearish
Opinion: All of the indexes closed higher yesterday with positive internals and mixed overall volumes. Multiple new closing highs were achieved. The data is sending some mixed signals with the exception of some sentiment readings that remain on red lights. Valuation has stretched further. So, although the charts continue to advance, we remain of the opinion that valuations are extended and vulnerable while overly bullish crowd sentiment remains a concern. By these metrics, risk is high versus reward for the near and intermediate term, in our view.
- On the charts, all of the indexes advanced yesterday with new closing highs being achieved on the SPX (page 2), DJI (page 2), COMPQX (page 3) and RUT (page 4). While the DJT (page 3) advanced, it remains below its short term uptrend line and resistance. So from the charts, no sell signals exist at present.
- On the data, only the 21 day NYSE McClellan OB/OS Oscillator is overbought at +62.85. The rest remain neutral and have been so for the bulk of the rallies year to date. In retrospect, it may require the 1 day levels to reach overbought status to result in some short term correction of import.
- Sentiment remains an issue as the OEX Put/Call Ratio (smart money) stands at an extremely bearish 3.21 with the pros very heavily skewed to puts and betting on weakness. The Rydex Ratio (contrary indicator) continues to show the leveraged ETF traders heavily leveraged long at 68.0. The balance of the data is largely neutral.
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- Valuation continues to stretch, in our view, as the forward SPX p/e based on 12 month forward earnings estimates from First Call has reached to a new decade high as a result of yesterday’s gains to 17.4X.
- In conclusion, although the charts continue to climb higher, we remain of the opinion that the combination of excessive bullish crowd sentiment and what we view to be rich valuations suggest the markets may well be vulnerable to some sizable price adjustment if and when events occur causing a shift in said sentiment. What those events may be are unknown to us. Nonetheless, we view the potential as reasonably probable given the current market setup.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.76% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $121.98 versus the 10 Year Treasury yield of 2.08%.
SPX: 2,063/???
DJI: 17,861/???
COMPQX: 4,813/???
DJT: 8,877/9,236
MID: 1,474/???
RUT: 1,219/???