Short Term Trends Remain Neutral
Opinion: All of the indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as volumes rose from the prior session. No technical support levels were violated although the COMPQX closed below its long term uptrend line. The data remains largely neutral and uninstructive at this stage. We are maintaining our “negative” near term outlook for the major indexes as extended valuation, high levels of margin debt and advisor complacency combine to suggest risk well outweighs reward at current levels.
- On the charts, all of the indexes closed lower yesterday with broadly negative internals on rising volume. However, in spite of the declines, no support levels were violated on the charts leaving all of the near term trends neutral. The SPX (page 2) did close on support that would be violated should weakness continue. The one technical event occurring which we find worthy of note was the COMPQX (page 3) closing below its long term uptrend line for the first time since the initiation of the rally from last November. It is, in our opinion, a sign of caution. However, we would need to see a violation of support for the picture to turn negative.
- The data is little changed and largely neutral. All of the McClellan OB/OS Oscillators remain neutral (All Exchange:-13.28/+15.9 NYSE:-15.33/+28.7 NASDAQ:-12.05/+4.26) as are the Total (0.77) and Equity (0.6) Put/Call Ratios. The Open Insider Buy/Sell Ratio is also neutral at 48.2 while the OEX Put/Call Ratio has turned bullish at 0.74 as the pros bought calls expecting some bounce from yesterday’s declines.
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- In conclusion, while the charts and data continue to suggest a rather neutral outlook, we remain of the opinion that a high level of risk is present versus potential reward as the forward valuation of the SPX at an 18.1 multiple (0.2 from a decade high) combined with heavy margin exposure (up 20.5% y/y) and the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 19.4/51.0 implying complacency on their part combine to suggest appreciable downside risk is present should an event occur that could cause a shift in sentiment. Republican failure to pass a healthcare bill putting proposed tax cuts in jeopardy could be such an event. Such shifts are far from uncommon in market history. And when they happen with the above combination in place, the result can be far more impactful than one might otherwise expect.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.1 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: 1,392/1,419
VALUA: 5,447/5,550