Some Sentiment Levels At New Extremes
Opinion: The indexes closed mostly higher yesterday with the exception of the DJT. Internals were positive on the NYSE and NASDAQ as volumes dropped from the prior session. There were no alterations of the near term trends for the indexes that remain mixed. The data remains mixed as well but now finds some of the sentiment levels at new extremes. Thus, we are not changing our view that the near term index trends should continue to be respected, until proven otherwise, while downside risk is appreciable given historically high market valuation, excessive margin debt exposure and investment advisor complacency.
- On the charts, the bulk of the indexes closed higher yesterday with positive internals but on lighter volume. The DJI (page 2) made another new closing high while the outlier of the DJT (page 3) closed lower and below another support level. Thus we have a divergence of trend between the DJI and DJT. The DJI remains in its near term uptrend as the DJT is in a near term downtrend. The rest of the index trends, by our work, are near term neutral.
- The data remains mixed with most of the McClellan OB/OS Oscillators neutral with the exception of the NYSE 21 day remaining overbought (All Exchange:-4.99/+33.35 NYSE:+7.79/+58.56 NASDAQ:-18.42/+10.47). Of note this morning is the extreme level of some of the sentiment indicators. The Rydex Ratio, a contrary indicator, (page 13) is at a new decade high of ETF trader’s leveraged long exposure. In contrast, the OEX Put/Call Ratio is at one of the highest levels of put exposure on the part of the pros that we have ever seen at 4.01. Granted the OEX has lost a good deal of its prescience over the past several months. Nonetheless, it is worthy of note, in our view.
- In conclusion, with the charts mixed signals, 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: 1,758/NA
RTY: 1,426/NA
VALUA: 5,565/NA