Risks Remain
Opinion: The indexes closed mixed Friday with positive internals on the NYSE while NASDAQ internals were mixed. Volumes increased from the prior session on both exchanges. The final results were mixed with a notable selloff in the high visibility technology names putting pressure on the COMPQX while some other indexes made new closing highs. The data remains neutral to positive but our three primary concerns of valuation, advisor complacency and high levels of margin leverage have not abated. As such, we are maintaining our near term cautious and “negative” outlook for the major equities in place as we perceive a poor risk/reward scenario remains.
- On the charts, the indexes closed mixed with the SPX (page 2), COMPQX (page 3) and DJT (page 3) closing lower on the day as the rest advanced. While NYSE internals were positive, the NASDAQ saw a slightly positive A/D but down volume notably surpassed up volume. The COMPQX suffered the greatest technical damage as it closed below its long term uptrend line while flashing a “bearish stochastic crossover” signal as the high visibility technology names took notable hits. However, its support level held after being tested on an intraday basis. In contrast, the DJI (page 2) and RTY (page 4) made new closing highs while the MID (page 4) closed above short term resistance. As such, the selloff appears to have been quite selective.
- The data is mixed to positive with all of the McClellan OB/OS Oscillators still neutral (All Exchange:+16.5/+26.87 NYSE:+13.86/+41.04 NASDAQ:+20.49/+13.89) as is the Open Insider Buy/Sell Ratio at 35.8. The put/call ratios have turned positive with the Total and Equity P/Cs (contrary indicators) seeing the crowd long puts at 1.06 and 0.72 while the pros via the OEX Put/Call Ratio are now long calls at 0.87.
- In conclusion, Friday’s action may or may not be the first crack in the markets. Support levels need to be violated to mark greater technical concerns. Nonetheless, the 18.2 forward p/e of the SPX at over a decade high with margin exposure up over 20% y/y and bullish advisors outnumbering bearish advisors 2.6:1 via the Investors Intelligence Bear/Bull Ratio have not budged a still suggest to us that the current risk/reward presented by the markets is unfavorable. Risk remains high via these measures, in our view, thus keeping our near term “negative” outlook intact.
- Forward 12 month earnings estimates for the SPX from IBES of $134.56 leave a 5.63 forward earnings yield on a 18.2 forward multiple, near a decade high.
SPX: 2,400/NA
DJI: 20,888/NA
COMPQX; 6,121/6,304
DJT: 9,160/9,412
MID: 1,715/NA
RTY: 1,391/NA
VALUA: 5,368/5,556