Data Turns Very Cautionary
Opinion
All of the indexes advanced Friday on strong volume and breadth with some new highs achieved. So the charts are positive but extended, in our opinion. Our concern remains regarding the near term in spite of the advances as a number of data points are very negative while valuations have reached new 10 year extremes. By our work, the ice supporting the indexes is dangerously thin.
- On the charts, Friday’s action was quite bullish as all of the indexes closed at or near their highs of the day on strong volume and positive breadth. Both the SPX (page 2) and DJI (page 2) made new all-time closing highs while the COMPQX (page 3) made a new 14 year closing high. Both the MID (page 4) and RUT (page 4) closed above resistance as well. So if the charts are so positive, why are we still so nervous? It is a combination of the vertical nature of the reflex rally (vertical moves tend to have sharp corrections) while data and valuation have become extremely cautionary.
- On the data, the McClellan OB/OS Oscillators are extremely overbought on the NYSE (+127.45) and NASDAQ (+115.83) with the NYSE 21 day overbought as well at +68.23. Only the 21 day NASDAQ is neutral at +37.98. The WST Ratio and its Composite are back on a “bear alert” signal at 71.0 and 192.7 while the Equity Put/Call Ratio (contrary indicator) shows the “crowd” heavy in calls at .50. They were very heavy in puts at the recent correction low. The Rydex Ratio (contrary indicator) also finds the leveraged ETF traders back near peak levels of overly bullish sentiment at 59.1 now that the DJI has risen over 1,500 points trough to peak. In short, there are enough red lights on the data dashboard to be of real concern, in our opinion.
- Finally, we find the SPX at marginal new highs as First Call forward SPX 12 month estimates have declined from the prior SPX peak to $127.58. So, while the index is fractionally higher than the September high, it is now more expensive and at new decades high of 15.8X.
- In conclusion, although the charts are technically positive, the fact that stocks are at their richest valuation in 10 years with excessive bullish sentiment and overbought conditions, we are of the opinion that chasing price at these levels could prove to be painful over the near term.
- 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 Composite: 4,487/?
- Dow Jones Transportation: 8,484/?
- MID: 1,377/1,425
- Russell 2000 : 1,119/1,174