DJI Hits New High With Negative Internals
Opinion: The indexes closed mixed yesterday with negative internals on the NYSE and NASDAQ as volumes rose versus the prior session. The action, in our opinion, describes a further divergence among the indexes and weakening of technical structure. We remain of the opinion that the near term chart trends should continue to be respected with the caveat that, in our view, substantial downside risk is present given extended market valuation, historically high levels of margin debt and investment advisor complacency.
- On the charts, the indexes closed mixed yesterday with negative internals on both the NYSE and NASDAQ as volumes rose from the prior session. NASDAQ internals were particularly weak. The net result was a combination of positive and negative action on the charts that suggests to us the indexes are expressing an increasing degree of divergence. The DJI (page 2) made another new closing high. However, we would note said high came on negative breadth and negative up/down volume implying a lessening of positive component action. Both the MID (page 4) and RTY (page 4) closed below their near term support levels while the RTY joined the DJT (page 3) in closing below its 50 DMA. The VALUA (page 5) tested support but held. So the charts, in our opinion are showing an overall weakening of market breadth with the select large cap stocks carrying the major indexes higher. This type of action is common during formation of market tops.
- The data is little changed. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-19.74/+21.4 NYSE:-14.1/+39.55 NASDAQ:-48.12/-7.91). The OEX Put/Call Ratio has flipped from a very bearish reading to a mildly bullish 0.96 as the pros jettisoned their put exposure. Both the Total and Equity Put/Call Ratios (contrary indicators) are bullish at 0.97 and 0.75. Yet we would note our experience over the past few months that the data has been less than informative regarding near term market probabilities.
- In conclusion, with the charts mixed signals increasing, the fact that the forward valuation of the SPX based on forward 12 month earnings estimates from Bloomberg is back at a 15 year high with an 18.5 forward multiple and margin debt is at historically extreme levels up 20.7% y/y and investment advisors entering levels of emotional complacency as seen by the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.5/60.2, we remain of the opinion that a significant amount of downside risk is present in the markets currently versus potential reward.
- Forward 12 month earnings estimates for the SPX from Bloomberg of $134.01 leave a 5.53 forward earnings yield on a 18.5 forward multiple, a decade high.
SPX: 2,429/NA
DJI: 21,305/NA
COMPQX; 6,305/NA
DJT: 9,072/9,428
MID: 1,747/1,758
RTY: 1,403/1,433
VALUA: 5,565/NA