Data Remains Mostly Cautionary
Opinion
Although the indexes appeared to have had an uneventful day yesterday, internals turned broadly negative, similar to the “masking” action of the indexes prior to the last correction. Meanwhile, several data points imply risk outweighs reward over the near term.
- Regarding the charts, they have yet to yield “sell signals” and, as such, their uptrends remain intact and bullish. The DJI (page 2) made another new all-time closing high yesterday while the COMPQX (Page 3) made a new 14 year high. So, on the surface, things look fine.
- Yet yesterday’s internal action was reminiscent of that seen prior to the last correction. While the large cap indexes appeared unfazed, internals were broadly negative on the NYSE as decliners outweighed advancers nearly 2:1 as up/down volumes did the same. More money chased notably fewer stocks. The COMPQX advanced but internals were very similar to those on the NYSE. This action resurrects our concern that funds are being thrown at the large cap ETFs while the balance of the stocks underperform. Note that the MID (page 4) and RUT (page 4) both closed lower and near their lows of the day yesterday. While these dynamics are the same as those seen prior to the correction, 1-day’s action cannot be considered conclusive. So as the charts appear rosy on the surface, yesterday put a wrinkle in the picture, in our opinion.
- On the data, the McClellan 1 day OB/OS Oscillators moved quickly back to neutral (NYSE:+25.91 NASDAQ:+26.82) but the 21 day levels remain very overbought on the NYSE (+110.79) and overbought on the NASDAQ (+73.69). The “crowd” is almost totally bullish with the new AAII Bear/Bull Ratio (contrary indicator) at 19.31/57.93 and the Rydex Ratio (contrary indicator) at 64.0 showing the leveraged ETF traders near all-time bullish sentiment. The pros continue to press their bets of expected weakness with a 1.96 OEX Put/Call Ratio (smart money).
- Finally, the 12 forward P/E for the SPX based on forward 12 month eps estimates of $127.99 remain at a decade high of 15.9X.
- In conclusion, while we have been frustrated by the markets’ advances of late and technical sell signals remain elusive, the balance of the evidence continues to imply risk, in our opinion.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.28% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.99 versus the U.S. 10-Year yield of 2.35%.
- S&P 500: 2,000/?
- Dow 30: 17,283/?
- NASDAQ Composite: 4,568/?
- Dow Jones Transportation: 8,772/?
- S&P Midcap 400: 1,420/1,439
- Russell 2000: 1,159/1,186