Risk Issues Remain Present
Opinion: The indexes closed mixed yesterday with positive internals on the NYSE and NASDAQ as NYSE volumes were flat versus the prior session while NASDAQ volumes rose. No technical events of import were registered on the charts while the data remains largely neutral. Yet while there are no significant cautionary indicators on the charts and data at present, the combination of high margin exposure, extended valuation and investment advisor complacency continue to suggest risk is elevated should there be a shift in the proverbial “wind”.
- On the charts, The SPX (page 2) and DJT (page 3) closed lower yesterday while the rest posted gains. The SPX tested its short term downtrend line but failed to violate, leaving that trend intact. The DJT tested its short term uptrend line but failed to violate leaving that trend intact. The COMPQX (page 3) remains in a short term downtrend while the rest of the indexes are in neutral, sideways trends. The cumulative advance/decline lines for all of the exchanges are neutral and above their 50 DMAs.
- The data remains largely neutral including all of the McClellan OB/OS Oscillators (All Exchange:-13.04/+8.33 NYSE:-14.86/+22.8 NASDAQ:-11.99/-4.9). The Equity and OEX Put/Call Ratios are neutral as well at 0.69 and 1.03 along with the Open Insider Buy/Sell Ratio at 47.9. And while the Total Put/Call Ratio (contrary indicator) finds the crowd long puts at 1.06, the ISEE Sentiment Indicator that only measures opening long customer transactions in call options over put options is counterbalancing with a very bearish 17.16.
- In conclusion, while we don’t see anything truly foreboding on the charts and data at the moment, our primary market concerns persist. The new Investors Intelligence Bear/Bull Ratio still shows investment advisors quite complacent at 18.8/52.5 while the use of margin is up 19.7% y/y. Forward valuation of the SPX is at an 18.1 multiple, just shy of a 15 year market peak, while another valuation metric from Hays Advisory is quite disturbing. They note that the U.S. stock market total valuation is now 1.3 times U.S. GDP. Only twice have these levels been seen, late 1999 and early 2007. From that vantage point, it suggests we are in “greater fool theory” territory and that risk levels are high versus potential reward.
- 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: 2,404/2,433
DJI: 21,305/21,505
COMPQX: 6,070/6,219
DJT: 9,439/NA
Mid: 1,730/1,758
RTY: 1,392/1,420
VALUA: 5,447/5,527