Data Continues Warning Signals
Opinion
The markets closed mixed Friday resulting in little to no change for the bullish trajectory on the charts. However, the data continue to flash red warning signals that, in combination with current valuation and the vertical path of the gains, suggest to us an appreciable amount of risk exists for the markets near term.
- Looking at the charts, the indexes closed mixed on Friday with some gainers and some losers but no notable impact on the charts was seen by our work. The SPX (page 2) made a new fractional closing high as the DJI (page 2) made a new closing high as well. However, both the COPMPQX (page 2) and DJI (page 3) closed lower. Internals were positive on the NYSE and mixed on the NASDAQ. Although no “sell” signals were given, the nearly vertical uptrends in combination with very overbought stochastic readings suggest some possible vulnerability, in our opinion.
- The data continues to sound its warnings as all of the McClellan OB./OS Oscillators are overbought with the NYSE at +80.37/+89.22 and the NASDAQ at +57.79/+64.15. The pros measured by the OEX Put/Call Ratio (smart money) remain very heavy in puts and looking for weakness at 1.84 while the Rydex Ratio (contrary indicator) shows the leveraged ETF traders near all-time highs of bullish expectations at 63.3. Insiders measured by the Gambill Insider Buy/Sell Ratio remain just shy of giving a bearish signal at 8.5 as they continue to sell on strength. As such, there is enough data, in our opinion, to warrant near term caution.
- Finally, we reiterate our opinion that the forward 12 month P/E for the SPX is at a decade high and has now lifted to a 16 multiple suggesting stocks are historically expensive via that metric.
- In conclusion, our song remains the same for the near term. While the charts have not given sell signals, they are extended while the crowd is overly bullish, stocks are historically expensive on a forward P/E basis and insiders along with the pros are looking for an exit.
- 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 $127.17 versus the U.S. 10-Year yield of 2.31%.
- 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