Some Data Turning More Cautionary
All of the major equity indexes closed higher Monday with positive internals on the NYSE and NASDAQ as overall trading volumes rose from those of the prior session. Once again, several new closing highs were achieved with all of the index charts remaining positive. Yet we are maintaining our near term “neutral” outlook as more of the data is turning cautionary while valuation becomes more compressed. In short, we are of the opinion that more attractive buying opportunities may be in the offering.
On the charts, all of the indexes closed higher Monday with positive internals and heavier overall trading volumes on the NYSE and NASDAQ.
· New closing highs were achieved on the SPX (page 2), DJI (page 2), COMPQX (page 3) and NDX (page 3).
· As well, the DJT (page 4), MID (page 4), RTY (page 5) and VALUA (page 5) closed above their near term resistance levels.
· As such, all are in near term uptrends. The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are positive as well.
· Yet there still are some concerns.
· All of the indexes are somewhat extended above their 50 DMAs, suggesting some degree of vulnerability while the VIX, at 12.77, is at levels seen three times over the past 12 months, all of which resulted in volatility and price corrections.
· As well, all of the stochastic levels remain overbought although they can stay in that condition for extended periods.
The data is starting to turn a bit more cautionary.
· While the 1-day McClellan OB/OS Oscillators are neutral on the All Exchange and NYSE, they are now overbought on the NASDAQ (All Exchange:+45.45 NYSE:+33.72 NASDAQ:+56.92) as well as all of the 21-day readings.
· The detrended Rydex Ratio (contrary indicator) has turned mildly bearish +0.60 while this week’s AAII Bear/Bull Ratio (contrary indicators) turned neutral at 29.0/34.0.
· Also, the Investor’s Intelligence Bear/Bull Ratio (contrary indicator) is notably bearish at 16.8/55.1 suggesting an excess of bullish sentiment/complacency on the part of investment advisors has increased.
· The Total and Equity put/call ratios are sending a similar message.
· The % of SPX stocks trading above their 50 DMAs is a neutral 69.1% as is insider buying at a 40.6 Open Insider Buy/Sell Ratio.
· Valuation is closing in on fair value with forward 12-month earnings estimates for the SPX at $172.46 via Bloomberg, leaving the forward p/e at a 17.9 multiple while the “rule of twenty” finds fair value at 18.2.
· The 10-Year Treasury yield stands at 1.79%.
· The earnings yield is 5.6%.
In conclusion, while we would normally be more constructive in our outlook, the VIX, stochastic levels, valuation and psychology data suggest some degree of caution may be appropriate, thus causing us to maintain our near term “neutral” outlook.