Opinion: Most of the indexes closed higher yesterday with the one exception of the COMPQX. Internals were positive on the NYSE and NASDAQ as volumes declined from the prior options expiration session. No technical events of import were registered while the data remains almost entirely neutral. Our near term outlook remains one of caution as we perceive risk to well outweigh reward given extended valuation, high margin debt and advisor complacency persist.
- On the charts, the only index to close lower on the day was the COMPQX (page 3). The rest posted advances although near the bottom end of their intraday ranges as sellers entered the markets near the close. While the DJT (page 3) and RTY (page 4) tested resistance, no support or resistance levels were violated. The current short term trends are neutral across the board with the exception of the SPX (page 2) that is positive. We would note there appears to be some weakening of relative strength among some of the technology stocks that have been primary drivers of the rally.
- The data is almost entirely neutral including all of the McClellan OB/OS Oscillators (All Exchange:+15.62/+25.64 NYSE:+14.81/+39.69 NASDAQ:+15.9/+12.35)> The Total (0.81), Equity (0.64) and OEX (1.16) Put/Call Ratios are neutral swell as is the Open Insider Buy/Sell Ratio (51.0). However, the new Investors Intelligence Bear/Bull Ratio (contrary indicator, page 9) remains bearish as bulls still outweigh bears buy a wide margin of 19.4/51.5.
- In conclusion, while the charts and data continue to suggest a rather neutral outlook, we remain of the opinion that a high level of risk is present versus potential reward as the forward valuation of the SPX at an 18.2 multiple (0.1 from a decade high) combined with heavy margin exposure (up 20.5% y/y) and the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 19.4/51.0 implying complacency on their part combine to suggest appreciable downside risk is present should an event occur that could cause a shift in sentiment. Such shifts are far from uncommon in market history. And when they happen with the above combination in place, the result can be far more impactful than one might otherwise expect.
- 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: 2,420/NA
DJI: 21,042/NA
COMPQX: 6,121/6,304
DJT: 9,160/9,487
MID: 1,715/NA
RTY: 1,392/1,419
VALUA: 5,447/5,550