SPX Forward Earnings Estimates Drop
Opinion: The indexes closed mixed yesterday with positive internals on the NYSE as volumes rose from the prior session while the NASDAQ saw negative internals but on lighter trading volume. There were no significant changes on the charts as all support levels have held during recent weakness. The data remains mixed but investment advisors hitting a new high of complacency while the forward 12 month earnings estimates have declined. So in spite of the benign nature of the charts, our major concerns of extended valuation, advisor complacency and high levels of margin debt persist, suggesting risk/reward is poor warranting our near term “negative” outlook.
- On the charts, The DJT (page 3), MID (page 4) and VALUA (page 5) closed higher on the day with positive internals on the NYSE. The rest declined with negative internals on the NASDAQ. No important chart events occurred aside from the MID making a marginally new closing high while the COMPQX (page 3) tested support and the SPX (page 2) gave a “bearish stochastic crossover” signal but has not violated support. As such, the near term chart trends remain a mixture of neutral and positive.
- The data is mostly neutral including all of the McClellan OB/OS Oscillators (All Exchange:+7.13/+32.12 NYSE:+9.38/+48.86 NASDAQ:+4.62/+17.25). The Equity P/C (0.68) OEX P/C (1.27) and Open Insider Buy/Sell Ratio (40.1) are all neutral as well. And while the AAII Bear/Bull Ratio (contrary indicator) is a mildly bullish 30/31, the new Investors Intelligence Bear/Bull Ratio (contrary indicator/page 9) finds advisors near peak levels of bullishness and complacency at 19.4/63.6. We would also note that Bloomberg’s forward consensus earnings estimates for the SPX have declined from $134.56 to $133.96.
- In conclusion, although the charts have yet to flash important sell signals, we cannot shake our concerns that SPX valuation is over a decade high with margin exposure up 20.5% on a y/y basis as advisors continue you their belief that there are only blue skies overhead, a potentially dangerous combination. Thus we remain concerned 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 $133..96 leave a 5.55 forward earnings yield on a 18.1 forward multiple, near a decade high.
SPX: 2,400/2,440
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