Opinion: All of the indexes closed lower yesterday with broadly negative internals on the NYSE while NASDAQ internals were mixed. Two short term uptrends were violated as all closed at or near their intraday lows. The data remains largely neutral and uninstructive. While the charts have not generated any notable sell signals, we remain cautious and “negative” in our short term outlook as extended valuation, high levels of margin debt and investment advisor complacency imply a high level of risk currently exists versus potential reward.
- On the charts, all of the indexes closed lower yesterday and near their intraday lows. The NYSE internals were quite negative while the NASDAQ A/D was broadly negative but up volume was greater than down volume, implying money chasing fewer stocks. The DJT (page 3) closed below its short term uptrend line that is now neutral as was also the case for the VALUA (page 5). So the SPX (page 2), DJI (page 2) and MID (page 4) remain in near term uptrends with the balance now neutral. No support levels were violated although the VALUA closed very close to support.
- The data is still largely neutral including all of the McClellan OB/OS Oscillators (All Exchange:-23.66/+27.42 NYSE:-22.38/+45.58 NASDAQ:-26.3/+11.21). The Total and OEX Put/Call Ratios remain neutral at 0.83 and 1.08 respectively as does the Open Insider Buy/Sell Ratio at 40.3. The Equity Put/Call Ratio (contrary indicator) is the only bullish signal as the crowd moved to puts at 0.72. All in all, the data scales are too evenly balanced to suggest any near term directional probabilities for the major indexes, in our opinion.
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- With all this said, we are forced to repeat our concerns that keep us nervous regarding the markets. The forward p/e for the SPX based on 12 month forward consensus earnings estimates from Bloomberg remains just shy of over a decade high at an 18.2 multiple. Investment advisors that are bullish well outweigh the bearish ones via the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 18.6/50.0 while the employment of margin has risen 20.5% on a y/y basis. It is normal for the markets to experience some consolidation after a period of gains. With the factors just stated in place, a shift in sentiment has the potential to accelerate the downside as deleveraging would likely be required. As such, we still see risk high versus potential reward at these levels.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.3 forward multiple, near a decade high.
SPX: 2,420/NA
DJI: 21,042/NA
COMPQX; 6,121/6,304
DJT: 9,160/9,487
Mid: 1,715/NA
RTY: 1,391/1,426
VALUA: 5,473/NA