Valuation & Margin Debt Remain Concerns
Opinion: All of the indexes closed modestly lower Friday with negative internals on the NYSE and NASDAQ as volumes declined from the prior session on both exchanges. No technical events of import were generated on the charts, leaving all of the near term trends intact. The data is mixed yielding a neutral projection. So while we maintain our technical view that the near term chart trends should be respected until proven otherwise, historically high valuation combined with excessive levels of margin debt continue to suggest that downside risk levels in the market are quite high at the present.
- On the charts, all of the indexes closed modestly lower Friday with negative internals on lighter volume. No support levels were violated, leaving all of the indexes in their current short term uptrends with the exception of the DJT (page 3) that is in a near term downtrend. The cumulative advance/decline lines for the exchanges remain positive and above their 50 DMAs.
- The data is mixed with the 21 day McClellan OB/OS Oscillators overbought on the All Exchange and NYSE while the rest remain in their neutral ranges (All Exchange:+19.35/+51.5 NYSE:+28.16/+73.4 NASDAQ :(+11.18/+32.39). The Total and Equity Put/Call Ratios are neutral at 0.74 and 0.56 respectively as is the Open Insider Sentiment Index at 43.2. The OEX Put/Call Ratio is bullish as it finds the pros very long calls at 0.37 as they bet on expectations of near term strength.
- In conclusion, while there is nothing particularly onerous on the charts or in the data to imply negativity to a significant degree, thus suggesting the near term trends of the charts should continue to be respected, the fact that the forward valuation of the SPX based on forward 12 month earnings estimates from Bloomberg are at a 15 year high with an 18.5 forward multiple and margin debt is at historically extreme levels as noted on the chart on page 9, we remain of the opinion that a significant amount of downside risk is present in the markets currently versus potential reward.
- Forward 12 month earnings estimates for the SPX from IBES of $134.01 leave a 5.4 forward earnings yield on a 18.5 forward multiple, over a decade high.
SPX: 2,429/NA
DJI: 21,305/NA
NASDAQ: 6,258/NA
DJT: 9,428/9,727
Mid: 1,746/NA
RTY: 1,426/NA
VALUA: 5,565/NA