Short Term Outlook Turns “Neutral”Opinion
All of the indexes closed higher yesterday with several new closing highs achieved on the charts. Internals were positive on the NYSE and NASDAQ as volumes declined form the prior session. The data remains mixed with a few cautionary signals appearing. Due to yesterday’s chart action, we are forced to shift our near term outlook to “neutral” from “neutral/negative”. However, we do so reluctantly as valuation has become even more extreme along with very high levels of complacency. Those issues, in combination with some others discussed below, continue to suggest risk may currently well outweigh potential reward, in our opinion. Nonetheless, the charts remain intact.
- On the charts, all of the indexes closed higher yesterday with positive internals. The only index unable to post a new closing high was the VALUA (page 5). While volumes were healthy, they were lower than those seen in the prior session’s market dip that we continue to view as a possible sign of institutional distribution. All of the short term trends are up except the VALUA, which is neutral. As well, the NASDAQ A/D has turned neutral from negative.
- The data is mixed. The only McClellan OB/OS Oscillator that is overbought is the 21 day NYSE (All Exchange:-5.95/+44.7 NYSE:+6.35/+71.5 NASDAQ:+5.32/+42.77). The rest are neutral. The OEX Put/Call Ratio is a bullish 0.74 as the pros are long calls. However, the Equity Put/Call Ratio (contrary indicator) finds the crowd very heavy calls at 0.53. As well, we continue to find very heavy insider selling via a 7.2 Gambill Insider Buy/Sell Ratio versus excessive bullish advisor sentiment as seen by the new Investors Intelligence Bear Bull Ratio (contrary indicator) at 16.5/63.1 to be quite disturbing. Our experience has been that when insiders are more than happy to sell to a euphoric crowd, trouble awaits not too far down the road. This is exacerbated by the fact that the forward valuation of the SPX based on forward 12 month SPX earnings estimates now stands at a 18.1 multiple as of yesterday’s close and well over a decade high.
- In conclusion, the charts are the only factor causing us to alter our near term outlook for the major equity indexes to “neutral” from “neutral/negative”. The other issues discussed above suggest to us that investing at current levels is equal to “picking up dimes in front of bulldozers”. We are riding in a car with worn out shock absorbers.
- Forward 12-month earnings estimates for the SPX from IBES of $132.19 leave a 5.52 forward earnings yield on a 18.1 forward multiple, over a decade high.
- SPX: 2,365/NA
- DJI: 20,761/NA
- Nasdaq: 5,804/NA
- DJT: 9,412/NA
- MID: 1,720/NA
- Russell: 1,377/1,357
- VALUA: 5,387/NA