SPX Forward 12-Month Estimates Decline Again
Opinion
The indexes closed mixed yesterday with little movement in either direction. While the charts remain largely intact, sentiment and valuation continue to send warning signals. So although the charts are sending little in the way of cautionary signals, the data and valuation continue to suggest a respectable amount of risk remains present in the equity markets, in our opinion.
- Our conundrum persists as the charts remain largely intact post yesterday’s action while the indexes closed mixed. There were no major signals given in either direction, by our work, as internals turned negative. The DJT (page 3) did make a new closing high but remains beneath its nearly vertical uptrend line while closing at the lower end of the day’s range. Given the serious technical breakdown in oil yesterday, we might have expected the DJT to respond more strongly. However, we admit we are somewhat biased in that opinion as both may be at opposite extremes.
- The SPX (page 2) and MID (page 4) also closed below their parabolic short term uptrends. Yet we can’t say those events are conclusive of a stall in the rally. In short, our concern is based more on other factors, which we admit have lesser predictive power over the short term, than the charts.
- The data still shows the McClellan OB/OS Oscillators overbought although lesser so given the minor action yesterday. The 1 day OB/OS are +77.34 on the NYSE and +70.71 on the NASDAQ while the NYSE 21 day is an overbought +52.03 with a neutral +31.53 for the NASDAQ 21 day. The WST Ratio and its Composite remain bearish at 64.0 and 167.8 while the Rydex Ratio (contrary indicator) still shows the “crowd” overly optimistic at 60. However, the pros are expecting more strength with a very bullish .5 OEX Put/Call Ratio (smart money).
- Another important point of concern for us is, as the markets have rebounded strongly, we see the forward 12 month First Call EPS estimates for the SPX falling yet again, this time to $127.17. The last time the SPX was at these levels, forward estimates were almost $2.00 higher. So the index is rising as estimates fade. Either estimates need to bounce back or the SPX should see some correction, in our opinion. . We suspect the latter may be the higher probability.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.32% 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 2.34%.
- S&P 500: 1,970/?
- Dow 30: 17,015/?
- NASDAQ: 4,487/?
- Dow Jones Transportation: 8,484/?
- S&P Midcap 400: 1,377/1,425
- Russell 2000: 1,119/1,174