Valuation and Psychology Still Intermediate Term Concerns
Opinion: Our next Morning Technical Note will be Monday, May 13th. All of the indexes closed lower yesterday with negative internals and higher trading volumes suggesting institutional distribution. While no technical support levels were violated, there were a few cautionary chart signals created. Yet the indexes remain confined within their respective trading ranges as the bulk of the data remains mixed and non-influential for the near term. As such, our short term outlook for the indexes is now neutral while psychology and valuation continue to cause concern for the more intermediate term.
- On the charts, all of the indexes closed lower yesterday with negative internals as volumes rose, particularly on the NYSE. The large cap indexes closed at or near their lows of the day. Both the SPX (page 2) and DJI (page 2) closed back below their 50 DMAs casting a minor shadow. Of note, the SPX closed directly on its intermediate term uptrend line from the October lows. Should the uptrend be violated, it would imply a test of important volume support at 2,040. Yet the indexes remain confined within their trading ranges leaving a neutral short term picture.
- We continue to watch the DJT (page 4) closely as a break of its support would turn the outlook more negative in general. Yet said break has not yet occurred.
- The data is mixed with the McClellan OB/OS Oscillators all neutral (NYSE:-1.4/-4.59 NASDAQ:-8.48/-14.8). The Put/Call Ratios are too diverse in their messages to suggest a near term propensity. As such, the data is non-directive at this stage, in our opinion.
- We continue to have intermediate term concerns as investor psychology still shows the Rydex Ratio (contrary indicator) at 70.2 with the leveraged ETF traders remaining very heavily leveraged long while the Gambill Insider Buy/Sell Ratio shows insiders increasingly moving to the sidelines at a neutral but just shy of bearish 9.9. As well, the current 16.8X forward valuation for the SPX based on forward 12 month First Call estimates remains near a decade high and, in our opinion, vulnerable to downside risk.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.96% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.22 versus the 10 Year Treasury yield of 1.93%.
SPX: 2,050/2,088
DJI: 17,642/17,970
COMPQX: 4,848/4,956
DJT: 8,647/9,002
MID: 1,496/???
RUT: 1,236/1,262