Looking Beyond The Charts
Opinion: All of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as volumes declined from prior levels on both exchanges. Multiple new closing highs were achieved on the charts while the data remains a mixture of inconclusive signals. Yet in spite of the positive trends on the charts, which tend to be a major ingredient of our analysis process, to focus on them solely is, in our opinion, taking a very myopic view of the situation. To ignore the facts that valuation is historically extended while investment advisors are near peak levels of enthusiasm and the use of margin to achieve performance has expanded notably is to ignore a confluence of events typically seen near market tops. As such, we remain of the opinion that a significant amount of risk remains versus potential reward for the equity markets in general.
- On the charts, all of the indexes closed higher yesterday with positive internals as volumes declined on the NYSE and NASDAQ. The SPX (page 2), DJI (page 2), MID (page 4), RTY (page 4) and VALUA (page 5) made new closing highs. The DJT (page 3) closed above resistance. The majority of near term trends are positive. As such, there is nothing currently on the charts that would be interpreted as sell signals. All of this would be wonderful if it was the only factor being considered. However, to do so, in our view, would be to look at the markets with one eye closed.
- The data is mixed. The 21 day NYSE McClellan OB/OS Oscillator is overbought at 64.97 while the rest are still neutral (All Exchange:+29.82/+46.7 NYSE:+34.37/+64.97 NASDAQ:+25.75/+31.35). The Equity Put/Call Ratio (0.61) and Open Insider Buy/Sell Ratio (36.0) are neutral while the Total and OEX Put/Call Ratios are on bullish signals at 0.97 and 0.87 respectively.
- Here is what we see as the problem if we look beyond the charts and “open our other eye” in our analysis. Bloomberg’s consensus of forward 12 month earnings estimates for the SPX has recently been shaved from $134.56 to $133.96 pushing the forward p/e for the SPX back up to an 18.2 forward multiple, the highest valuation we’ve seen by that metric in over a decade. Investment advisors as measured by the Investors Intelligence Bear/Bull Ratio (contrary indicator) are near peak levels of market optimism at 19.4/63.6 suggesting an almost euphoric attitude. Finally, the use of margin to achieve performance has expanded by 20.5% on a y/y basis. In combination, they suggest real downside risk is present if and when inevitable consolidation occurs. How lucky do you feel?
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.2 forward multiple, near a decade high.
SPX: 2,400/NA
DJI: 20,888/NA
COMPQX; 6,121/6,304
DJT: 9,160/9,487
MID: 1,715/NA
RTY: 1,391/NA
VALUA: 5,473/NA