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Some Improvements, Some Clouds

Published 01/29/2014, 09:38 AM
Updated 07/09/2023, 06:31 AM

Forward 12 Month SPX Earnings Estimates Decline
Opinion
For the short term, we are inclined to expect a bit more “sideways” action from the major equity indexes given the state of the data and charts. However, there are a few new clouds that may have more intermediate term negative influence, those being a notable decline in IBES forward 12-month earnings estimates for the SPX as well as the continued slide in the Baltic Dry Index. As such, bounces in the indexes should not be taken completely to heart at this time, in our opinion.

  • On the charts, while the markets did manage to end in the black yesterday, volumes were lower than the prior selloff that takes some shine off of yesterday’s progress. Technical improvements came as the NASDAQ (page 3) closed above its 50 DMA while both the DJT (page3) and MID (page 4) managed to close above their short term resistance levels. Yet these improvements are not strong enough, in our opinion, to suggest we are out of the proverbial woods.
  • On the data, only the NASDAQ 1-day McClellan OB/OS Oscillator remains oversold at -62.52. The rest are neutral (NASDAQ 21 day -12.61 NYSE:-37.19/+20.94). As such, there is less fuel for a bounce by this measure. We have seen some pickup in insider buying as the Gambill Insider Buy/Sell Ratio has risen to a neutral 13% as of 1/27. It is an improvement but not a buy signal quite yet. Meanwhile, the “crowd” remains too bullish with a 1.48 detrended Rydex Ratio (contrary indicator).
  • Two intermediate term concerns not often discussed in these notes are as follows. Forward IBES 12 month SPX earnings estimates have just been reduced notably from $120.60 down to $118.01. The decline, should it hold, obviously creates some headwinds for the markets.
  • Secondly, the Baltic Dry Index that is a fairly good indicator of future Asian economic activity has been in a downtrend for the past few weeks and hit a new low just yesterday. A slowing in Asian growth prospects suggested by this index would be problematic as well.
  • For the longer term, we remain bullish on equities as they remain undervalued with a 6.58% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $118.01 versus the 10-Year Treasury yield of 2.75%.
  • SPX: 1,775/1,830
  • DJI: 15,713/16,375
  • NASDAQ: 4,074/4,129
  • DJT: 7,095/7,348
  • MID: 1,290/1,330
  • RUT: 1,119/1,147

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