Data Mostly Neutral
Opinion: All of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ. NYSE volumes declined from the prior session while NASDAQ volumes rose. Some new closing highs were achieved on the charts whose near term trends remain a mix of neutral to positive. The data remains largely neutral. However, given some issues discussed below, we are not thrilled with what we perceive as the current risk/reward scenario for the equity indexes. Thus we are maintaining our near term “neutral/negative” outlook for the major equity indexes.
· On the charts, all of the indexes closed higher yesterday with the SPX (page 2) and DJI (page 2) making new closing highs. The DJT (page 3) managed to close above resistance and its intermediate term uptrend line, both of which were violated in the prior session. Short term trends for the indexes find the SPX, DJI and MID (page 4) positive while the rest of the index trends are near term neutral, by our work. The advance/decline line for the NASDAQ remains negative with the All Exchange neutral and NYSE positive in that regard.
· The data remains mostly neutral. Only the 21 day NYSE McClellan OB/OS Oscillator is mildly overbought with the rest neutral (All Exchange:+6.25/+35.18 NYSE:+12.93/+53.32 NASDQAQ:+10.71/+26.3). The Total and Equity put;/’call ratios are also neutral at 0.83 and 0.63 respectively. The OEX Put/Call Ratio (smart money) is a bullish 0.5 but the Gambill Insider Buy/Sell Ratio still finds insiders as active sellers at current levels. As such, the data scales are fairly evenly balanced.
· Here are our concerns. The forward valuation of the SPX based on forward 12 month earnings estimates from IBES is over a decade high at 17.9 multiple. Stocks are expensive from that historical viewpoint. Insiders are active sellers as noted above. Investment advisor sentiment is complacent with a 17.5/61.2 Investors Intelligence Bear/Bull Ratio while, in our opinion, market breadth may be starting to show some deterioration. Bear in mind that for the large cap indexes just to test their respective 50 DMAs, it would result in a 70 point decline on the SPX and an 800 point drop on the DJI. Given that potential and the issues discussed, we find the risk reward scenario for the near term less than exciting. Thus we maintain our near term “neutral/’negative” outlook for the major equity indexes.
· Forward 12 month earnings estimates for the SPX from IBES of $132.21 leave a 5.57 forward earnings yield on a 17.9 forward multiple, a decade high.
SPX: 2,300/NA
DJI: 19,946/NA
COMPQX; 5,670/NA
DJT: 9,225/9,504
MID: 1,697/NA
RTY: 1,377/1,357
VALUA: 5,387/NA