Forward 12-Month SPX EPS Estimates Decline Again
Opinion
This is about as nuts as we have ever seen regarding opposing signals form the charts and data. All of the charts improved as they rose on good volume and breadth while surpassing resistance and 50 DMAs in multiple cases. However, the data is now flashing some of the most cautionary signals we have seen in quite some time. Additionally, forward EPS estimates for the SPX have declined again leaving valuation stretched. In short, we think we may be skating on some very thin ice for the near term.
- On the charts, all of the indexes advanced on good volume and breadth while the SPX (page 2), DJI (page 2), RUT (page 4) and MID (page 4) all closed above their 50 DMAs. Resistance levels were surpassed in every case while the DJT (page 3) made a new closing high. There is no question that the action was bullish. Yet the stochastic readings are in the upper 90s across the board suggesting the rally may be too extended.
- On the data, the WST Ratio and its Composite are on major bear alert signals of 96.1 and 393.9 respectively. These are the highest bearish levels in its 18 year history. The 1 day McClellan OB/OS Oscillators are extremely overbought as well on the NYSE (+120.47) and NASDAQ (+103.91) suggesting at least a pause if not some retracement of the rally. The Rydex Ratio (contrary indicator) has also risen to very cautionary levels as the leveraged ETF traders are now heavily long at 53.2. As such, the data is sending some potentially strong warning signals.
- Finally, of a more fundamental concern is the 12 month forward First Call estimates for the SPX have declined for the second time recently. They are now at $127.58 versus the prior $128.41 level. That leaves the forward 12 month P/E for the SPX back at a decade high of 15.6X. In our humble opinion, that leaves little if any room for any mishaps.
- In conclusion, in spite of the positive action in the charts, there is enough evidence, in our opinion, to exercise some real caution over the near term for the major equity indexes.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.43% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.58 versus the U.S. 10-Year yield of 2.28%.
- S&P 500: 1,950//1,985
- Dow 30: 16,700/17,015
- NASDAQ: 4,426/4,592
- Dow Jones Transportation:8,484/?
- S&P Midcap 400:1,367/1,412
- Russell 2000: 1,119/1,157