Valuation Moderating
All of the indexes closed higher Friday with positive internals on the NYSE and NASDAQ as volumes declined on the NYSE while those on the NASDAQ increased from the prior session. All but one of the charts broke above their near term resistance levels as all remain in uptrends. The data, while mostly neutral, finds the 1 day McClellan OB/OS Oscillators overbought. As well, forward earnings estimates for the SPX have been declining, suggesting it is closing in on fair value versus its prior undervalued status. Nonetheless, we have yet to see sufficient evidence to alter our near term “positive” outlook for the major equity indexes.
- On the charts, all, of the indexes closed higher Friday with positive internals. The only index unable to close above its near term resistance level was the NDX (page 3) as the rest achieved that goal. As such, all of the index charts remain in near term uptrends as do the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ. Stochastic levels are overbought but have not flashed bearish crossover signals at this point.
- The data remains mostly neutral although all of the McClellan OB/OS Oscillators are now overbought (All Exchange:+73.17/+98.28 NYSE:+78.34/+122.96 NASDAQ:+71.52/+79.31). While remaining in neutral territory, the Open Insider Buy/Sell Ratio (26.9) and % of SPX stocks trading above their 50 DMAs (89.7%) are close to turning negative. Yet we would note they are not great “timing” instruments for short term market shifts. Valuation may be the most important metric at this point as the forward 12 month earnings estimates for the SPX via Bloomberg has declined to $167.76 from $171.00 a few weeks ago, leaving the forward 12 month p/e for the SPX at 16.6 versus the “rule of 20” implied fair value of a 17.3 multiple. While still undervalued, we believe it worth noting as the spread between actual and fair value has been shrinking. Should the SPX continue to advance as estimates decline, it may prove problematic. The “earnings yield” stands at 6.04%.
- In conclusion, while there are a few issues as discussed above that have us looking over our shoulders a bit, the state of the charts and data continue to suggest we maintain our near term “positive” outlook for the major equity indexes at this point in time..
- SPX: 2,723/2,796
- DJI: 25,290/25,882
- Nasdaq: 7,236/7,501
- NDX: 6,845/7,110
- DJT: 10,298/10,675
- MID: 1,864/1,917
- Russell: 1,509/1,587
- VALUA: 6,000/6,219
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