Opinion: All of the indexes closed higher yesterday with positive internals as volumes declined from the prior options expiration session. Two of the index charts made new closing highs as the near term trends remain a mix of neutral and positive. The data remains mixed with no dominant message regarding the near term probabilities. Yet, we reiterate our three primary concerns that valuation, high margin debt and advisor complacency could prove to be quite damaging to the markets should investors become nervous. They suggest to us, in spite of the charts and data, that risk is high versus potential reward. We remain near term “negative” as a result.
- On the charts, all of the indexes closed higher yesterday with positive internals on both exchanges as volumes declined from Friday’s options expiration. The SPX (page 2) and DJI (page 2) made new closing highs. The near term trends are unchanged with the COMPQX (page 3) and RTY (page 4) neutral with the balance positive. No sell signals are present.
- The data is mixed as most of the McClellan OB/OS Oscillators are neutral (All Exchange:+10.37/+50.68 NYSE:+16.63/+73.1 NASDAQ:+4.88/+31.13) with the NYSE 21 day level overbought and the All Exchange mildly overbought. All of the put/call ratios are neutral (Equity P/C:0.58 Total P/C:0.8 OEX P/C:1.14) as is the Open Insider Buy/Sell Ratio at 37.5. There has been some moderation in the Investors Intelligence Bear/Bull Ratio (contrary indicator) but it remains in bearish territory at 18.6/50.0 as bullish advisors still outweigh the bearish ones by a wide margin.
- So while the charts and data continue to imply no major issues lie ahead for the markets, we now find the forward valuation of the SPX at an 18.3 forward multiple (page 9) that is a new decade high. Given the Fed is in the process of raising interest rates, said valuation appears extended. Margin interest, as stated previously, is up over 20.5% on a y/y basis as well. Given the complacency of advisors, we believe the markets could be quite vulnerable should investors find cause for concern. High margin debt would only serve to accelerate the downside should advisors begin to shift to the other side of the boat. This combination of factors still suggests to us that risk is high versus potential reward for the near term.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.3 forward multiple, near a decade high.
SPX: 2,420/NA
DJI: 21,042/NA
COMPQX; 6,121/6,304
DJT: 9,160/9,487
MID: 1,715/NA
RTY: 1,391/1,426
VALUA: 5,473/NA