Sentiment On Red Warning Signals
Opinion
The indexes closed mixed yesterday with mixed internals while the COMPQX and RUT made new closing highs. The short term uptrends on the charts remain intact. However, several sentiment indicators are now on red warning signals suggesting overall market opinions have become excessively bullish while valuation suggests the markets are historically expensive. So while the charts continue to imply further upside, our sense is risk remains quite high versus potential reward. As such, we await a more opportune point in time to be buyers of equities in general.
- On the charts, the indexes closed mixed with negative internals on the NYSE while the NASDAQ saw positive internals as the COMPQX (page 3) and RUT (page 4) made new closing highs. All of the short term uptrends remain intact suggesting further progress until such trends are violated. All of the stochastic levels remain very overbought but have yet to yield actionable bearish signals.
- The data shows most of the McClellan OB/OS Oscillators to be neutral with the exception of the NYSE 21 day at an overbought +52.29. They do not present a strong directive at this point. However, several sentiment indicators are now on red lights. The new AAII Bear/Bull Ratio (contrary indicator) shows the “crowd” excessively bullish at 20.3/45.37 along with the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 14.1/59.5 as advisors can only see higher prices. The Rydex Ratio (contrary indicator) as well shows leveraged ETF traders at a new decade peak of leveraged long positions at 70.0.
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- In contrast, the Gambill Insider Buy/Sell Ratio shows insiders continue to shed stock at a bearish 7.8 with the pros betting on weakness with a bearish 1.83 OEX Put/Call Ratio (smart money). Sentiment, as such, is very cautionary.
- Valuation remains extended based on a decade high 17.3X forward First Call earnings estimates for the SPX that have been in a consistent decline and, in our opinion, vulnerable to some multiple contraction.
- In conclusion, although the charts continue to track North, there plenty of evidence on the scales to suggest caution over the near to intermediate term, in our view.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.78% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $121.98 versus the U.S. 10-Year yield of 2.02%.
- S&P 500: 2,063/?
- Dow Jones 30: 17,861/?
- NASDAQ; 4,813/?
- Dow Jones Transportation: 8,877/9,236
- S&P Midcap 400: 1,474/?
- Russell 2000: 1,190/?