Near-Term Outlook Remains “Neutral”Opinion
All of the indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as volumes rose on both exchanges from the prior session. Some of the large cap indexes saw more support levels violated while the data remains largely neutral in its forecast. Yet in spite of recent weakness, the charts, in our opinion, appear to be going through a sideways chop in response to the early February selloff. The “chop” has a fairly wide range but is reasonable given the magnitude of the prior decline. As such, even with the futures suggesting more weakness on today’s open, we are inclined to maintain our near term “neutral” outlook intact for the major equity indexes.
- On the charts, all of the indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as volumes rose from the prior session on both exchanges. However, the negative breadth was notably less severe than that of Wednesday’s action. The SPX (page 2), DJI (page 2) and COMPQX (page 3) closed below their near term support levels while the NDX (page 3) closed below its near term uptrend line. The COMPQX and NDX are the only indexes remaining above their 50 DMAs while the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are now short term negative and below their 50 DMAs. Yet in spite of the weakness, in our view, all remain in sideways near term patterns but of a fairly broad range.
- The data is not very helpful as it is largely neutral, showing no strong near term projections in either direction. The McClellan OB/OS Oscillators remain neutral (All Exchange:-23.36/-34.392 NYSE:-28.44/-22.46 NASDAQ:-32.06/-32.42). The Equity Put/Call Ratio is a neutral 0.72 while the OEX and Total Put/Call Ratios continue to counterbalance with a very bearish 1.71 and very bullish 1.29 respectively. The Openinsider Buy/Sell Ratio remains neutral at 30.2.
- We would note the moderation in valuation that has occurred as the forward 12-month P/E for the SPX based on forward 12 month consensus earnings estimates has slipped to 17.0, well below the prior correction 18.7 level. If we factor in expectations of 3 Fed hikes this year that would calculate to 3.55%, the “rule of 20” would imply fair value at a 16.45 multiple, only slightly below current levels.
- So, given the overall picture discussed above, we remain near term neutral in our outlook for the major equity indexes.