Valuation Remains Stretched
Opinion: The indexes closed mixed yesterday with positive internals on the NYSE while NASDAQ internals were mixed. Trading volumes were flat on the NYSE while NASDAQ volumes were below those of the prior session. There were no major technical events registered on the charts while the data remains largely neutral as well. Yet while the charts and data are not particularly onerous, we remain cautious as valuation remains stretched, investment advisor sentiment remains complacent and margin exposure remains high. Combined, they suggest to us that risk outweighs potential reward at current levels.
- On the charts, the indexes closed mixed yesterday with the SPX (page 2) and COMPQX (page 3) closing higher as the rest declined. We would note that the NASDAQ advanced on negative breadth of 1152/1701 and tepid volume. No support or resistance levels were violated although the COMPQX did regain its 50 DMA. The short term trends of the SPX and COMPQX are negative, the DJT (page 3) positive with the rest neutral. Cumulative A/D of the All Exchange and NYSE are neutral while the NASDAQ is negative. Poor breadth on the NASDAQ suggests an erosion of internal strength.
- The data is largely neutral including all of the McClellan OB/OS Oscillators (all Exchange:-16.98/+10.4 NYSE:-17.85/+28.01 NASDAQ:-17.01/-5.82), The Equity Put/Call Ratio (0.64) and Open Insider Buy/Sell Ratio (44.7). The OEX Put/Call Ratio is bearish at 2.32 as the pros have loaded up on puts as they expect near term weakness.
- Our primary market concerns persist. The new Investors Intelligence Bear/Bull Ratio still shows investment advisors quite complacent at 18.8/52.5 while the use of margin is up 19.7% y/y. Forward valuation of the SPX is at an 18.1 multiple, just shy of a 15 year market peak, while another valuation metric from Hays Advisory is quite disturbing. They note that the U.S. stock market total valuation is now 1.3 times U.S. GDP. Only twice have these levels been seen, late 1999 and early 2007. From that vantage point, it suggests we are in “greater fool theory” territory and that risk levels are high versus potential reward.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.1 forward multiple, near a decade high.
SPX: 2,404/2,433
DJI: 21,305/21,505
COMPQX: 6,070/6,219
DJT: 9,439/NA
Mid: 1,730/1,758
RTY: 1,392/1,420
VALUA: 5,447/5,527