Some Short-Term Trends ShiftOpinion
The indexes closed mostly lower yesterday with the one exception of the DJI. Internals were negative on the NYSE and NASDAQ as volumes rose from the prior session. The charts saw some weakness via moves below short term uptrend lines. The data remains mixed. So while the technical picture has taken on some water although most support levels held, we remain of the opinion that historically high valuation combined with extreme levels of margin debt suggest a high level of risk currently exists for the equity market.
- On the charts, only the DJI (page 2) closed higher yesterday making a fractionally new all-time high. The rest of the indexes declined on negative breadth and negative up/down volume. The worst action was seen on the DJT (page 3) that closed below another support level as well as its 50 and 150 DMAs. It’s near term trend remains negative. The COMPQX (page 3), MID (page 4), RTY (page 4) and VALUA (page 5) all closed below their short term uptrend lines, shifting their trends from positive to neutral. However, all of their support levels held. The cumulative advance/decline lines remain positive on the All Exchange and NYSE while the NASDAQ A/D has turned neutral from positive. So the charts may be displaying some early signs of weakness. Breaks of support would be required to confirm.
- The data is mixed with only the 21 day NYSE McClellan OB/OS Oscillator overbought while the rest are neutral (All Exchange:-9.29/+38.28 NYSE:-2.35/+58.62 NASDAQ:-16.09/+21.03). The Total and Equity Put/Call Ratios are on bullish signals at 0.94 and 0.71 while the OPEX Put/Call Ratio is a mildly bearish 1.4. The Open Insider Buy/Sell Ratio remains a neutral 50.0 but the new Investors Intelligence Bear/Bull Ratio (contrary indicator) (page 9) remains bearish as bulls well outweigh bears at 16.7/57.8.
- In conclusion, while the charts have darkened just a bit, the fact that the forward valuation of the SPX based on forward 12 month earnings estimates from Bloomberg is at a 15 year high with an 18.5 forward multiple and margin debt is at historically extreme levels and up 20.7% y/y, we remain of the opinion that a significant amount of downside risk is present in the markets currently versus potential reward.