Does Valuation Matter?Opinion
The bulk of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as volumes rose on both exchanges. Chart results were mixed but most short term trends remain positive. The data has become a bit more mixed with a few caution signals appearing. So we find ourselves “fighting the tape” in regards to our near term “negative” outlook that has been in place for the past several sessions as the indexes have continued to claw upward. Yet we continue to ask the question, “Do we really want to be buyers at these levels?” with the forward valuation of the SPX at over a decade high, investment advisors showing a high level of complacency and margin levels up over 20% on a y/y basis. In our opinion, they suggest a reasonably high level of downside risk remains for the major equity indexes.
- On the charts, the only index to close lower yesterday was the DJT (page 3) as both the NYSE and NASDAQ saw positive internals on higher trading volume. Positive technical events occurred on the COMPQX (page 3) making a new closing high while the RTY (page 4) closed above resistance and its 50 DMA, turning its short term trend from neutral to positive. However, possible caution signs were registered on the DJT and DJI (page 2) as both closed below their respective short term uptrend lines. The cumulative advance/decline lines for all of the exchanges remain positive and above their 50 DMAs. So there is little to argue with on the charts.
- The data has turned a bit more mixed. All of the McClellan OB/OS Oscillators remain neutral (All Exchange:+12.3/+29.28 NYSE:+0.85/+43.05 NASDAQ:+23.82/+16.86) as does the Open Insider Buy/Sell Ratio at 36.0. However, all of the put/call Ratios have turned bearish with both The Equity and Total P/C Ratios (contrary indicators) at 0.55 and 0.7 respectively while the OEX P/C Ratio has flipped back to a very bearish 2.39 as the pros are back to betting on near term weakness. We would note the prescience of the OEX signal has diminished significantly over the past several months, in our opinion.
- So as we find ourselves on the wrong side of the fence currently as the charts remain generally positive and the data only slightly cautionary, the 18.2 forward p/e of the SPX at over a decade high with margin exposure up over 20% y/y and bullish advisors outnumbering bearish advisors 2.6:1 via the Investors Intelligence Bear/Bull Ratio, the question of “How lucky does one feel?” comes to the fore.