Breadth & Valuation Raise Questions
Opinion: The indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as NYSE volumes rose from the prior session with NASDAQ volumes flat. The DJI made a new closing high but a few factors arose that are raising some questions as to whether or not the near term trends will continue. We remain of the opinion that said trends should still be respected until proven otherwise. However, factors discussed below suggest some degree of caution may be warranted.
- On the charts, all of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ. The DJI (page 2) made a new closing high but was the only one to do so. The SPX (page 2) gave a bearish stochastic crossover signal along with the MID (page 4). Violations of support would be needed to become actionable. Another issue is the All Exchange cumulative advance/decline line made a lower low, joining the NASDAQ in turning its trend to negative. Both imply a weakening of internal market breadth. The NYSE cumulative A/D remains positive. As well, the 10 year Treasury yield hit its highest point since May and above resistance at 2.41%. So while the near term trends of the indexes are unchanged in a mix of neutral and positive trends, some issues are arising that are worthy of note and should be watched closely for any further developments. Also, we find it curious that the VIX actually closed higher yesterday at 11.04. Given the markets advance, one would have expected it to decline.
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- The data is mostly neutral. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-40.29/33.44 NYSE:-31.39/+44.5 NASDAQ:-46.69/+29.88). The Total and Equity Put/Call Ratios are neutral at 0.78 and 0.63 respectively as is the Open Insider Buy/Sell Ratio at 38.4. The OEX Put/Call Ratio, however, is bearish at 1.76. Forward valuation of the SPX at a 15 year high of an 18.8 forward multiple of forward expected earnings is notable as well.
- In conclusion, while the charts remain generally positive and should be respected until proven otherwise, a number of issues are gathering that should temper our enthusiasm, in our opinion. Some caution is warranted.
- Forward 12 month earnings estimates for the SPX from Bloomberg of $136.79 leave a 5.33 forward earnings yield on a 18.8 forward multiple, a decade high.
SPX: 2,547/NA
DJI: 22,403/NA
COMPQX; 6,464/NA
NDX: 5,994/NA
DJT: 9,542/9,986
MID: 1,810/NA
RTY: 1,450/1,512
VALUA: 5,646/5,843