Valuation Not At A Premium First Time Since June 2020
The major equity indexes closed mixed Tuesday with negative internals on the NYSE while the NASDAQ had negative breadth but positive up/down volume.
All closed near the midpoints of their intraday ranges. No violations of support, resistance, or trend were generated on the charts, leaving all still in near-term downtrends.
Meanwhile, the data continues to send some strong positive signals, particularly in regard to investor sentiment. As well, the forward 12-month p/e for the SPX is now at ballpark fair value after having traded at a premium since June 2020.
Yet, while the data is in the green zone, the charts have yet to alter their downtrends or violate resistance that we view as a requirement to be more positive in our near-term outlook while long term investors, in our view, could do some selective buying.
On the charts, the major equity indexes closed mixed yesterday with the SPX, COMPQX, NDX and RTY posting gains as the rest declined. Internals were mostly negative for the NYSE and NASDAQ except for the NASDAQ showing positive up/down volume.
However, as all closed near the midpoint of the session, no technical improvements were registered, leaving all in near-term negative trends and below their 50 DMAs.
Cumulative market breadth remains negative on the All Exchange, NYSE, and NASDAQ while the oversold stochastic levels on the charts have yet to initiate bullish crossover signals.
The data, however, continues to send some very bullish signals with investor sentiment (contrarian indicators) remaining at historically high levels of bearish expectations.
- The McClellan 1-Day OB/OS oscillators remain oversold and still suggesting a bounce (All Exchange: -85.26 NYSE: -91.55 NASDAQ: -80.88).
- The % of SPX issues trading above their 50 DMAs (contrarian indicator) dropped to 17% and is on a bullish signal and at its lowest level in two years.
- The Open Insider Buy/Sell Ratio dipped to 73.7%, remaining neutral.
- We reiterate the most encouraging data factor for the near-term, in our view, remains the sentiment data. The detrended Rydex Ratio (contrarian indicator) remains very bullish at -2.23. As it’s chart shows, only five times in the past decade have the ETF traders been so heavily leveraged short, all of which were followed by rallies.
- As well, this week’s AAII Bear/Bull Ratio (contrarian indicator) is at a very bullish 2.75 and at a 20-year peak matched only by the 2008-2009 financial crisis as investment banks collapsed. Also, the Investors Intelligence Bear/Bull Ratio (contrary indicator} is on a very bullish signal and at a decade peak of fear at 39.3/30.9. Crowd fear is at very extreme levels.
- The forward 12-month consensus earnings estimate from Bloomberg for the SPX slipped to $235.56. Thus, the SPX forward multiple is 17.0 as is the “rule of 20” finding ballpark fair value at 17.0. This is the first time since June 2020 that the forward p/e for the SPX has not been at a premium.
- The SPX forward earnings yield is 5.89%.
- The 10-year Treasury yield closed lower at 2.99%. We view support as 2.5% and resistance at 3.2%.
In conclusion, while the data is suggesting a positive turn in market action, the charts have yet to get in line. In our opinion, chart and breadth improvement are necessary to become more optimistic.
SPX: 3,894/4,152 DJI: 31,074/32,995 COMPQX: 11,442/12,502 NDX: 11,886/13,044
DJT: 14,290/14,906 MID: 2,299/2,513 RTY: 1,690/1,855 VALUA: 8,122/8,882