Some Data and Valuation Still Cautionary
Opinion
The indexes closed mixed yesterday with mostly negative internals as volumes declined from the prior session. And while the charts remain in their nearly vertical short term uptrends some of the data in combination with current valuations continue to suggest to us that risk outweighs potential reward over the near term.
- On the charts, there was mixed results for the indexes yesterday. We would note that while internals were largely negative, volumes did decline. The COMPQX (page 3) made a new fractionally higher 14 year closing high as the DJT (page 3) made a new fractionally higher all-time closing high. The MID (page 4) rallied to resistance but failed while the RUT (page 4) stalled at resistance.
- Although the following is not a “major” signal, the SPX (page 2) formed a candlestick “doji” pattern (issue opens, trades higher and lower but closed at or near opening price) suggestive of possible exhaustion in the rally. Given the fact that the DJI has run 1,500 points trough to peak of late, exhaustion would not be an unlikely event, in our opinion. However, the vertical trend lines have yet to be violated for the most part.
- Some of the data still suggests caution as well. The McClellan OB/OS Oscillators are mostly overbought with the NYSE 1 day at an extreme of +107.47 with the NASDAQ 1 day +93.37. The NYSE 21 day is an overbought +57.25 with the NASDAQ 121 day a neutral +25.14. The overbought conditions suggest short term risk is present. Meanwhile, the Rydex Ratio (contrary indicator) shows the leveraged ETF traders back at levels of extreme optimism as prior to the correction of 61.0. At the correction lows, the level was 39. So, sentiment and overbought conditions suggest caution by our work.
- Finally, we reiterate our concern that while the SPX is at new highs, forward 12 month earnings estimates have been declining to $127.58 leaving the forward P/E at 15.8X. That is a decade high seen only in mid-2007, prior to the market collapse. We are not suggesting a coming collapse. However, valuations are historically rich at these levels via this metric.
- In conclusion, we still are of the opinion that short term risk outweighs reward for the major equity indexes.
- 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 2.35%.
- S&P 500: 1,970/?
- Dow 30: 17,015/?
- NASDAQ Composite: 4,487/?
- Dow Jones Transportation: 8,484/?
- S&P Midcap 400: 1,377/1,425
- Russell 2000: 1,119/1,174