Valuation Level Declines FurtherOpinion
All of the indexes closed lower yesterday with broadly negative internals on the NYSE and NASDAQ as volumes rose versus the prior session. Several support levels were violated on the charts, leaving all in their near term downtrends. Some of the data remains encouraging while valuation has declined that, by some measures, suggest the markets are now undervalued. Yet the veracity of the recent downdrafts of the indexes have yet to show any technical signs on the charts that would suggest recent weakness has climaxed. So while we believe some opportunity exists given recent price adjustments, we have yet to see action on the charts that would suggest weakness has been exhausted.
- On the charts, all of the indexes closed notably lower yesterday with broadly negative internals on heavy volume. All closed at or near their intraday lows. Several support levels were violated on the charts including the SPX (page 2), COMPQX (page 3), NDX (page 3), MID (page 4) and VALUA (page 5). New support levels are listed below. All of the cumulative advance/decline lines remain negative and below their 50 DMAs as the index charts remain in their near term downtrends. While the stochastics are showing some bullish reversal signals, the charts have yet to produce action that would imply we have seen the bottom.
- The data is mixed. All of the McClellan OB/OS Oscillators are oversold with the 1 day levels extremely so (All Exchange:-134.45/-68.17 NYSE:-145.56/-76.02 NASDAQ:-126.54/-57.63). The Total Put/Call Ratio is a bullish 0.91 but the OEX Put/Call Ratio still finds the pros extremely heavy in puts at 4.25 as they expect more weakness. Sentiment levels appear to be little changed. We would note the significant adjustment in valuation over the past week. In the middle of last week, the forward 12 month p/e for the SPX based on forward 12 month consensus earnings estimates from Bloomberg stood at 18.7. As estimates have risen while price has declined, we now find said valuation at a 16.5 multiple. One metric of fair value is the “rule of 20” that says 20 minus the yield of the 10-Year Treasury approximates fair value. That calculation results in a 17.15 multiple, suggesting the markets are now undervalued.
- In conclusion, while valuation has moderated notably and the oscillators are bullish, we need to see price action on the charts suggestive of selling exhaustion to reverse the current negative outlook for the indexes.