Data Raises A Few Yellow FlagsOpinion
The indexes closed mostly lower yesterday with the one exception of the DJI. NYSE internals were positive on higher volume while NASDAQ internals were negative on lower volume. No support levels were violated on the charts, leaving the short term trends intact. The data remains mixed but is sending a few more caution signals. As such, the index trends remain split and should continue to be respected. However, we remain of the opinion that appreciable downside risk is present due to historically high valuation, excessive margin debt and investment advisor complacency.
- On the charts, all of the indexes closed lower yesterday with the exception of the DJI (page 2) that made another new closing high. The only other technical event of note is the SPX (page 2) flashing a “bearish stochastic crossover signal” Recent bearish crossovers in some of the other indexes have been followed by weakness. However, as with the rest of the charts, unless support is violated, the SPX signal is not actionable. So the charts remain split with the DJI the only one in a near term uptrend, the DJT (page 3) the only one in a near tern downtrend and the balance of the charts in neutral, sideways patterns.
- The data remains mixed with a couple of new yellow flags being raised. The bulk of the McClellan OB/OS Oscillators are neutral with the exception of the NYSE 21 day being overbought (all Exchange:-13.5/+32.71 NYSE:-2.35/+59.17 NASDAQ:-26.34/+7.97). The Equity Put/Call Ratio and Open Insider Buy/Sell Ratio are neutral at 0.62 and 46.0 respectively. However, the OEX Put/Call Ratio has turned an extremely bearish 3.33 as the pros are loaded to the gills with puts while the new Investors Intelligence Bear/Bull Ratio (contrary indicator) has turned bearish again as advisors are devoid of any market concerns at 16.5/60.2.
- In conclusion, with the charts mixed signals, the fact that the forward valuation of the SPX based on forward 12 month earnings estimates from Bloomberg is near a 15-year high with an 18.4 forward multiple and margin debt is at historically extreme levels and up 20.7% y/y and investment advisors entering levels of emotional complacency, we remain of the opinion that a significant amount of downside risk is present in the markets currently versus potential reward.