Valuation At New Decade High
Opinion: All of the indexes closed higher Friday with mixed internals on the NYSE while NASDAQ internals were positive. However, overall volumes declined on both exchanges from the prior session. The data is on a largely neutral reading. So although the charts are generally positive and data benign, the fact that valuation is at a new decade high while investment advisors are exhibiting a high level of complacency as margin exposure continues to extend, we remain of the opinion that the markets are vulnerable, due to a lack of “shock absorbers”, should negative news hit the tape. We continue to have a “negative” risk/reward opinion for the near term on the major equity indexes.
- On the charts, all of the indexes closed higher Friday. But while the NYSE saw a positive advance/decline, down volume exceeded up volume by a notable margin, bringing the quality of the advance into question. The NASDAQ saw positive internals but overall volume declined from the prior session as did on the NYSE. The SPX (page 2), DJI (page 2) and COMPQX (page 3) made new closing highs while the DJT (page 3) and RTY (Page 4) closed above prior resistance. The near term trends remain a mix of neutral and positive projections. Also, the advance/decline lines for the exchanges are positive and above their 50 DMAs.
- The data is largely neutral, including all of the McClellan OB/OS Oscillators (All Exchange:+43.07/+33.07 NYSE:+40.14/+47.62 NASDAQ:+46.67/+20.91), Total (0.82), Equity (0.60) and OEX (1.17) Put/Call Ratios, as well as the Open Insider Buy/Sell Ratio (43.8). Two bearish signals persist in the ISEE Put/Call Ratio (+10.7) and Rydex Ratio (71.0).
- So with the charts positive and data neutral, we would usually expect our outlook to be more sanguine. The reasons that is not the case come from the forward valuation of the SPX hitting a new decade high of an 18.2 forward multiple (page 9) while investment advisors (contrary indicator) are all on the bullish side of the boat via the Investors Intelligence Bear/bull Ratio (18.3/51.9) while the use of margin to achieve performance has risen over 20% on a y/y basis. The combination of these three factors has historically converged at important market tops. As such, we remain of the opinion that current risk/reward is poor and thus maintain our near term “negative” outlook for the major equity indexes.
- Forward 12 month earnings estimates for the SPX from IBES of $134.56 leave a 5.63 forward earnings yield on a 18.2 forward multiple, near a decade high.
SPX: 2,400/NA
DJI: 20,888/NA
COMPQX; 6,121/NA
DJT: 9,160/9,412
MID: 1,715/1,754
RTY: 1,380/1,416
VALUA: 5,368/5,537