Remaining Near Term Cautious
Opinion: The indexes closed mixed yesterday with positive internals on the NYSE and NASDAQ as volumes declined from the prior session on both exchanges. No technical events of import were generated on the charts while the data is little changed but with a couple of blinking yellow lights present. Yet while there are no significant sell signals on the charts and the data remains fairly benign, we remain “negative” and cautious regarding the indexes near term prospects as historically extended valuation, high margin debt and advisor complacency suggest potential reward is minimal while risk is elevated.
- On the charts, the indexes saw little movement yesterday with the SPX (page 2) and DJI (page 2) closing fractionally lower while the rest posted modest gains. Internals were positive on both exchanges as volumes declined. No support/resistance levels or trend lines were violated leaving the SPX and DJI in positive short term trends as the rest are neutral. All are above their 50 DMAs with the exception of the VALUA (page 5) that violated that level on Wednesday. The cumulative advance/decline lines are neutral on the All Exchange and NYSE as the NASDAQ’s has turned negative.
- The bulk of the data is neutral as are all of the McClellan OB/OS Oscillators (All Exchange:-19.88/+14.27 NYSE:-31.62/+25.3 NASDAQ:-11.04/+3.88), the Total Put/Call Ratio (0.8) and Open Insider Buy/Sell Ratio (46.9). Two yellow lights are flashing as the OEX Put/Call Ratio finds the pros remain heavily weighted in puts as they expect weakness at 2.65 while the crowd measured by the Equity Put/Call Ratio (contrary indicator) is long calls at 0.5. So the data is mildly cautious.
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- In conclusion, while the charts and data that have typically been the meat of our analysis are not all that disturbing, we remain of the opinion that a high level of risk is present versus potential reward as the forward valuation of the SPX at an 18.2 multiple (0.1 from a decade high) combined with heavy margin exposure (up 20.5% y/y) and the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 18.6/50.0 implying complacency on their part combine to suggest appreciable downside risk is present should an event occur that could cause a shift in sentiment. Such shifts are far from uncommon in market history. And when they happen with the above combination in place, the result can be far more impactful than one might otherwise expect.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.3 forward multiple, near a decade high.
SPX: 2,420/NA
DJI: 21,042/NA
COMPQX; 6,121/6,304
DJT: 9,160/9,487
MID: 1,715/NA
RTY: 1,392/1,419
VALUA: 5,447/5,550