Data Suggests Pause
Opinion: All of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as volumes dipped from the prior session on both exchanges. Some new closing highs were achieved on the charts whose near term uptrends remain intact. However, some of the data is now suggesting the recent rally is running low on fuel and may be due for a pause or partial retracement. However, while we continue to respect the near term trends, valuation remains a concern as the forward 12 month p/e for the SPX based on forward 12 month earnings estimates is back to over a decade high at an 18.2 multiple.
- On the charts, all of the indexes closed higher yesterday with positive internals. New closing highs were registered on the SPX (page 2) and COMPQX (page 3) while the MID (page 4) closed above its near term resistance and 50 DMA. As such, the short term uptrends in all of the index charts remain intact as do the uptrends of all of the cumulative advance/decline lines that are also above their 50 DMAs. So there is little to argue with on the charts at this point other than most of the stochastic readings are overbought. Yet thay have not given bearish crossover signals at this stage.
- The data, on the other hand, is suggesting some potential for a pause/retracement. All of the McClellan OB/OS Oscillators are overbought (All Exchange:+66.8/+59.88 NYSE:+65.07/+71.84 NASDAQ:+72.29/+51.21) while the OEX Put/Call Ratio is a mildly bearish 1.42 as the pros are leaning to the put side expecting some near term weakness. The ISEE Put/Call Ratio is bearish as well at 18.5. The balance off the data is largely neutral.
- In conclusion, while the charts are currently in good shape from a near term perspective, in our opinion, the data is implying some potential for a pause/retracement of the recent rally as some of the “fuel” has been depleted. Valuation back at peak levels would suggest the same. Until the current chart trends altered, we remain of the opinion that said trends should continue to be respected.
- Forward 12 month earnings estimates for the SPX from Bloomberg of $137.23 leave a 5.56 forward earnings yield on a 18.2 forward multiple, a decade high.