Valuation Stretched
Opinion
All of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as volumes dropped from the prior session. Every index chart saw technical improvements with three new closing highs being registered. The data remains mixed and not very instructive. So while we feel we are “fighting the tape” at the moment, the fact that forward valuation of the SPX is at a new decade high while investment advisor sentiment continues to show a high level of complacency continues to be a concern as it suggests the market’s “shock absorbers” are weak should unpleasant news cross the tape. Perhaps this morning’s payroll data may be such an event. As such, we remain of the opinion that risk remains high and warrants a cautious “negative” outlook for the near term.
- On the charts, all of the indexes closed higher yesterday with positive internals on both exchanges as volumes declined from the prior session. Every chart saw technical improvement. The SPX page 2), DJI (page 2) and COMPQX (page 3) all made new closing highs. The DJT (page 3), MID (page 4), RTY (page 4) and VALUA (page 5) all closed above their short term resistance levels while the RTY and VALUA closed above their short term downtrend lines as well. All of the advance/decline lines are positive and above their 50 DMAs.
- The data remains mixed. All of the McClellan OB/OS Oscillators remain neutral (All Exchange:+30.07/+18.3 NYSE:+37.18/+36.99 NASDAQ:+24.95/+2.04) as are the Equity Put/Call Ratio (0.66) and Open Insider Buy/Sell Ratio (43.8). Both the Total (contrary indicator) and OEX Put/Call Ratios are bullish at 1.00 and 0.79 respectively. However, the ISEE Put/Call Ratio (contrary indicator) that measures “customer only opening transactions” is in bearish territory for the first time since April 2016 at 10.56 while investment advisor sentiment (contrary indicator) continues to display a high degree of complacency with an Investors Intelligence Bear/Bull Ratio of 18.3/51.9. When we combine the advisor readings with the fact that the forward P/E for the SPX is at a new decade high of an 18.1 forward multiple, we cannot help but feel that the market’s “shock absorbers” are quite weak. Bad news could have a greater than normal impact should sentiment turn cautious while valuation offers little support. As such, we remain “negative” in our near term outlook as a result.