SPX Forward Earnings Estimates Reduced
Opinion: The indexes closed higher yesterday with positive internals as the SPX and DJI managed to repair some technical damage. However, volumes shrank notably leaving the gains suspect, in our opinion. Most of the data remains neutral with one exception as forward earnings estimates for the SPX have been reduced. As such, though we may see some near term strength that may test resistance levels, internal breadth and valuation suggest to us that reasons for continued expected strength are lacking for the intermediate term causing a cautious outlook for that timeframe.
- On the charts, all of the indexes closed higher yesterday with positive breadth. However, volumes were notably lighter than the prior decline implying weakening demand. The SPX (page 2) and DJI (page 2) both managed to close back above their 50 DMAs and intermediate term uptrend lines that were violated in the prior session. No other technical events of note occurred. We would note two disturbing factors. First, as the SPX approaches its prior highs, we now find almost half (49%) of its components trading below their 50 DMAs. The implication is that of lessening participation not seen in healthy markets. As well, all of the stochastic readings remain on bearish crossover signals. Although the stochastics are not primary indicators, they cast a shadow of concern.
- The data remains largely neutral including all of the McClellan OB/OS Oscillators (NYSE:-0.15/+46.66 NASDAQ:+4.65/+11.85). Both the Total and Equity Put/Call Ratios are neutral at .79 and .56. However, we once again find the pros placing very heavy beats on near term expected market weakness as the OEX Put/Call Ratio (smart money) has risen to a very high 2.31. As such, the data holds an ever so slight cautious tone.
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- The intermediate term remains a concern for us as First Call has again lowered their forward 12 month earnings estimates for the SPX to $123.25 from $123.81 leaving the forward p/e back at a decade high of 17X on a forward valuation.
- In conclusion, although the indexes may see bounces testing resistance over the short term, we are far from convinced that all is well for the short or intermediate term.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.87% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $123.25 versus the 10 Year Treasury yield of 1.90%.
SPX: 2,067/2,115
DJI: 17,827/18,204
COMPQX: 4,898/???
DJT: 8,647/9,002
MID: 1,496/1,540
RUT: 1,249/???