What should Fed do after hot Q3 GDP data? Wall Street weighs in
Data Turns Mostly Neutral
Opinion: The indexes closed mixed on Friday with the COMPQX closing at a new high. However, volumes rose as internals turned negative, suggesting distribution in spite of the COMPQX’s advance. The poor breadth exhibited Friday on the NASDAQ as it made a new high continues to be a concern for us as it implies fewer and fewer stocks are participating in the market gains. The data is essentially neutral with one cautionary signal. So, for the near term, our outlook is neutral with a slightly negative bias while we remain cautious for the more intermediate term.
- On the charts, volumes rose on negative internals Friday, implying distribution. Although the NASDAQ internals were negative, a few of its components had enough strength to push the COMPQX (page 3) to a new closing high. The SPX (page 2) and DJI (Page 2) both tested resistance but failed as the SPX rose and the DJI declined. The DJT (page 3) and RIT (page 4) also tested resistance and failed while the MID (page 4) closed near its lows and below its short term uptrend line. So the overall performance was truly a mixed bag. All of the stochastic levels are overbought with the MID and DJT crossing back below the 80 signal line and posing a slight negative.
- The data remains largely neutral including the McClellan OB/OS Oscillators (NYSE:+42.12/+1.57 NASDAQ:+22.9/-8.63). The Equity Put/Call Ratio (contrary indicator) at .55 shows the crowd long calls sending a negative message while it is countered by the OEX Put/Call Ratio (smart money) at .68 revealing the pros also long calls and expecting some near term strength, leaving the net message at neutral. We would note the WST Ratio and its Composite are on a “bear alert” signal for the second consecutive day at 75.9 and 184.9 that takes an otherwise neutral outlook and turns it slightly negative.
- So for the near term, our interpretation of the evidence suggests a neutral/negative short term forecast. Margin debt has increased on the rally back up to 15% y/y that keeps us concerned for the intermediate term along with the forward p/e for the SPX based on 12 month forward First Call estimates of 126.04 at 16.9X and just short of its decade high valuation.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.93% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.04 versus the 10 Year Treasury yield of 2.35%.
SPX: 2,079/2,130
DJI: 17,793/18,120
COMPQX: 5,103/???
DJT: 7,987/8,306
MID: 1,499/1,527
RUT: 1,239/1,274