The major equity indexes closed higher Thursday with positive internals on the NYSE while the NASDAQ saw negative breadth but positive up/down volume. Trading volumes were light. Four of the indexes made new all-time closing highs while the chart trends remain unchanged and mostly bullish. However, as we have noted ad nauseum in our comments, investor sentiment remains near peak levels of bullish expectations while valuation still suggests the markets are richly valued, both of which imply high levels of potential risk exist. Thus, in spite of the positive chart trends, we are maintaining our near term “neutral” outlook for the equity markets as we perceive risk/reward to be tenuous.
On the charts, all the major equity indexes closed higher Thursday with positive internals on the NYSE while the NASDAQ saw negative breadth with light trading volumes on both.
- The SPX (page 2), DJI (page 2), NDX (page 3) and VALUA (page 5) made new all-time closing highs.
- Regarding trend, all remain bullish except the DJT (page 4) and RTY (page 5) that are neutral.
- Cumulative breadth turned positive from neutral for the All Exchange as is the NYSE. However, the NASDAQ cumulative A/D remains neutral.
- As we have yet to see any important sell signals generated, the chart structures remain generally bullish.
On the other hand, the data is still sending some cautionary signals.
- While the 1-day McClellan OB/OS Oscillators remain neutral (All Exchange: -13.03 NYSE: -3.97 NASDAQ: -20.93), the psychology data and valuation continue to suggest risk levels are elevated.
- The Open Insider Buy/Sell Ratio (page 9) is neutral at 32.2 on a slight uptick but has been in a cautionary mode through most of the rally.
- In contrast, the leveraged ETF traders, measured by the detrended Rydex Ratio (contrarian indicator), remains in bearish territory as the leveraged long ETF traders continue their leveraged long exposure at a bearish 1.17.
- Last week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) was unchanged at a bearish 17.2/63.6 and at peak levels seen over the past decade while the AAII Bear/Bull Ratio saw little change at 25.05/45.02 and remains near peak levels as well.
- As a whole, the sentiment indicators suggest a high level of complacency exists.
- The forward 12-month consensus earnings estimate from Bloomberg of $158.43 have stretched valuation to a SPX forward multiple of 23.7 while the “rule of 20” still finds fair value of 19.1.
- The combination of extended valuation and investor bullish sentiment remain our primary concerns. The SPX forward earnings yield is 4.22% with the 10-year Treasury yield at 0.92%.
In conclusion, the chart/data debate still suggest a “neutral” near-term outlook is appropriate as the potential for downside risk is present, in our opinion.
SPX: 3,695/NA
DJI: 30,209/NA
COMPQX: 12,700/NA
NDX: 12,650/NA
DJT: 12,370/12,747
MID: 2,222/NA
RTY: 1,840/2,010
VALUA: 7,712/NA