Some Data At Peak Warning Levels
Opinion
Several of the indexes made new highs yesterday on positive breadth and volume while overall volumes declined. As such, the uptrends of the charts remain intact. However, some of the data has reached warning levels that continue to suggest to us that in spite of bullish trends in the charts, risk remains high for the equity markets over the near term.
- On the charts, all of the uptrends remain intact as the SPX (page 2), DJI (page 2), and DJT (page 3) all made new closing highs. The NASDAQ (page 3) made a new 14 year closing high while the RUT (page 4) closed above resistance. All of the indexes closed at or near their highs of the day. As such, we have yet to see any notable “sell” signals from the charts.
- However, the data continues to imply risk is high from several perspectives. While all of the McClellan OB/OS Oscillators are overbought (NYSE:+76.86/+110.29 NASDAQ:+66.78/+84.7) with the NYSE 21 day exceptionally so, the 21-day levels are their most overbought since March of this year suggesting a respectable amount of short term risk exists.
- The Rydex Ratio (contrary indicator) shows the leveraged ETF traders at peak levels of bullish sentiment seen just prior to the last correction. The OEX Put/Call Ratio (smart money) still shows the pros betting on some weakness as they remain long puts at 1.58 as the WST Ratio and its Composite remain on bearish signals of 67.9 and 156.0. By these metrics, the markets appear to be vulnerable over the near term.
- Finally, valuations remain historically stretched as viewed by the forward 12 month forward EPS estimates for the SPX leaving the forward p/e at 16X, a decade high.
- In conclusion, although the markets continue to march higher, there are several factors suggesting risk is high for the near term and that the crowd may be in for a rude awakening.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.24% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.17 versus the U.S. 10-Year yield of 2.36%.
- 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: 1,159/1,184