Charts Improve But SPX Forward EPS Estimates Decline
Opinion
Yesterday’s strong advances on good volume and breath brought some further improvement to the charts but all of the indexes are now at the high volume resistance levels mentioned in yesterday’s report while some of the data has become more cautionary in tone. As such, we are keeping our near term outlook for the indexes at neutral with a slightly negative bias.
- On the charts, there were several technical improvements yesterday as volumes and breadth were strong. All of the indexes closed above minor short term resistance levels while the DJT (page 3) had the most impressive performance and managed to close above its 50 DMA. As well, the DJT and COMPQX (page 3) closed above their short term downtrend lines. We would now note, however, that all of the indexes are within a hair’s breadth of high volume resistance levels that we suspect could prove to be problematic for the short term.
- When we take the data into account, it adds to or suspicion as the McClellan 1 day OB/OS Oscillators are now nicely overbought on the NYSE (+97.88) and NASDAQ (+79.85) while both of the 21 day levels have turned neutral at -17.68 and -32.27 respectively. The WST Ratio and its Composite are both bearish at 77.5 and 187.7 and now on a “bear alert” signal.
- Finally, the forward 12 month earnings estimates by First Call for the SPX have been reduced to $128.41 from the prior $129.05 level leaving the forward 12 month P/E back above 15X, the high range for the past decade.
- In conclusion, we are of the opinion that there is reason to suspect the easy money from the prior heavily oversold conditions has been made as the indexes now have to contend with significant resistance with mildly negative data support.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.61% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $128.41 versus the 10 Year Treasury yield of 2.21%.
S&P 500: 1,875/1,950
Dow 30: 16,308/16,660
NASDAQ Composite: 4,244/4,465
Dow Jones Transportation: 8,059/8,500
S&P Midcap 400: 1,315/1,373
Russell 2000: 1,075/1,121