Three Factors Suggest Risk Remains High
Opinion: All but one of the indexes closed lower yesterday with negative internals on both the NYSE and NASDAQ as volumes rose from the prior session. No support levels or trend lines were violated, leaving the short term trends intact. The data remains largely neutral. Nonetheless, we remain cautious and “negative” in our near term outlook for the major equity indexes as three factors continue to converge suggesting the markets may be quite vulnerable should unpleasant and unexpected news hit the tape.
- On the charts, all of the indexes closed lower yesterday with the exception of the RTY (page 4) closing fractionally higher. Internals were negative as volumes rose on both exchanges. No support levels or trend lines were violated, leaving the SPX (page 2), DJI (Page 2), COMPQX (page 3) and DJT (page 3) in short term uptrends while the balance are neutral. We would note the MID (page 4) flashed a “bearish stochastic crossover” signal but has yet to become actionable until its support level would be violated on a closing basis. The stochastic levels for the rest of the indexes remain overbought but the cumulative advance/decline lines for all of the exchanges remain positive and above their 50 DMAs.
- The majority of the data is neutral including all of the McClellan OB/OS Oscillators (All Exchange:-1.67/+17.22 NYSE:-1.36/+32.42 NASDAQ:-4.2/+2.52), the Equity and Total Put/Call Ratios (0.59 and 0.77 respectively)and the Open Insider Buy/Sell Ratio (40.4). One caution signal is coming from the OEX Put/Call Ratio at 2.36 as the pros remain very heavily weighted in puts as they bet on their expectation of near term weakness.
- So in spite of the benign nature of the charts and data, we remain “negative” in our near term outlook as we perceive a high level of risk being present due to three important factors typically seen near market tops. Valuation is extended with the forward p/e of the SPX staying just shy of a decade high with an 18.1 forward multiple (page 9), investment advisors showing a high degree of complacency via the 19.2/50.0 Investors Intelligence Bear/Bull Ratio (contrary indicator) and margin debt expanding by over 20% on a y/y basis. The combinations of these three factors portend a very rough road ahead should the markets experience a rise in concern from its current level of enthusiasm.
- Forward 12 month earnings estimates for the SPX from IBES of $134.56 leave a 5.63 forward earnings yield on a 18.1 forward multiple, near a decade high.
SPX: 2,400/NA
DJI: 20,888/NA
NASDAQ; 6,121/NA
DJT: 9,160/9,412
MID: 1,715/1,754
Russell: 1,385/1,412
VALUA: 5,368/5,537