Valuation And Margin Remain Concerns
Opinion: The indexes closed mostly higher yesterday with positive internals on the NYSE and NASDAQ as volumes rose on both exchanges from the prior session. Multiple new closing highs were achieved leaving all of the near term trends intact. The data remains largely neutral. We remain of the opinion that the current near term trends of the indexes should be respected until proven otherwise. However, the extended valuation of the SPX in combination with high levels of margin debt continue to be of concern as they suggest risk levels are high should any negative events hit the tape.
- On the charts, the only index closing lower yesterday was the DJT (page 3) that had violated its near term uptrend line at the close of Tuesday’s session. Internals were positive on the NYSE and NASDAQ as volumes rose from the prior session. New closing highs were achieved on the SPX (page 2), COMPQX (page 3), MID (page 4), RTY (page 4) and VALUA (page 5). We would note the SPX closed at its “return line” of its uptrending channel that has been in place since mid-March. The implication is that the lower end of the channel will likely be tested at some point over the next few weeks. All of the short term trends are intact as are the positive cumulative Advance/decline lines for the All Exchange, NYSE and NASDAQ.
- The data remains largely neutral although the NYSE McClellan OB/OS Oscillators have slipped into overbought territory at 55.7/53.02 on its 1 and 21 day levels. The rest of the OB/OS levels are neutral (All Exchange:+30.44/+33.66 NASDAQ:+33.32/+23.1). The Equity and Total Put/Call Ratios are neutral at 0.56 and 0.77 respectively as is the Open Insider Buy/Sell Ratio at 31.1. The OEX Put/Call Ratio remains bearish at 1.57 as the pros are weighted in puts, expecting weakness.
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- In conclusion, the generally positive chart trends appear to rule, and should be respected until proven otherwise, in spite of our concerns regarding the following. The use of margin is up 20.7% y/y. Forward valuation of the SPX is at an 18.46 multiple, a 15 year market peak, while the U.S. stock market total valuation is now 1.3 times U.S. GDP (only seen in late 1999 and early 2007). These issues suggest potential market vulnerability should there be a shift in trend. However, said trend shifts have yet to appear on the charts.
- Forward 12 month earnings estimates for the SPX from IBES of $134.01 leave a 5.42 forward earnings yield on a 18.46 forward multiple, over a decade high.
SPX: 2,429/NA
DJI: 21,305/NA
COMPQX: 6,188/NA
DJT: 9,566/9,727
MID: 1,746/NA
RTY: 1,416/NA
VALUA: 5,565/NA