Data Warnings Intensify
Opinion
The indexes continued their northward trek yesterday with some new closing highs on positive breadth and volume. However, the data warning signals have intensified back to, and in some cases above, levels seen at the prior market peak suggesting risk is quite high versus potential reward over the near term. As well, valuations are now more stretched than at the prior peak due to declining 12 month forward SPX EPS estimates. We remain nervous for the short term.
- On the charts, the indexes continued to march higher yesterday as volumes declined slightly. As such, in spite of their vertical trajectory, we have yet to see technical sell signals via price. All of the indexes closed at or near their highs of the day showing bulls remain in control. The SPX (page 2), DJI (page 2) and DJT (page 3) all made new closing highs while the MID (page 4) closed above its short term resistance. As such, the uptrends remain intact.
- What continues to keep us concerned is the markets and investors are choosing to ignore the same problems we saw from the data at the prior peak. The McClellan 1 and 21 day OB/OS Oscillators are mostly overbought (NYSE:+76.82/+60.02 NASDAQ:+68.95/+43.67). Only the NASDAQ 21 day is neutral.
- Sentiment is off the charts again as everyone is quite bullish except the insiders. The new AAII Bear/Bull Ratio (contrary indicator) is seeing another major cautionary signal as bears have disappeared at 15.05/52.69 while the leveraged ETF traders measured by the Rydex Ratio (contrary indicator) are at a euphoric 61.4. The crowd is drunk with optimism. Meanwhile insiders have intensified their selling activity to a very cautionary 8.1 Gambill Insider Buy/Sell Ratio. It is only 1/10th of a point from being outright bearish. And the pros measured by the OEX Put/Call Ratio (smart money) have finally flipped to being very long puts at a very bearish 1.96. The data has plenty of flashing red lights.
- Finally, we now see the forward multiple for the SPX at a 10 year peak of 16X First Call estimates of $127.17 which is down almost $2.00 from the prior market peak. Near term valuations are rich via this metric.
- So the charts say the markets can go higher while the data suggests risk is quite high. Are we willing to join the feeding frenzy? No.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.26% 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 2.38%.
- S&P 500: 1,979/?
- Dow 30: 17,157/?
- NASDAQ: 4,521/?
- Dow Jones Transportation: 8,484/?
- S&P Midcap 400: 1,388/1,425
- Russell 2000: 1,141/1,174