Near Term Outlook Remains “Neutral”
Opinion: The indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as volumes declined on both exchanges. A few more cracks appeared on the charts although no support levels were violated. The data remains a mixed bag of conflicting indicators. So although our concerns regarding valuation and advisor sentiment persist, the charts and data continue to imply a “neutral” outlook for the major equity indexes is appropriate at this stage.
· On the charts, all of the indexes closed lower yesterday with broadly negative internals. However, volumes decline versus those of the prior session. While no support levels on the charts were violated, some other cautionary signals did arise. The DJI (page 2) closed below its short term uptrend line as it and the SPX (page 2) flashed bearish stochastic crossover signals. Both the DJT (page 3) and MID (page 4) closed below their intermediate term uptrend lines. We also now find the advance/decline lines for all of the exchanges have turned negative suggesting a further weakening of breadth.
· The data is diverse. The NYSE and NASDAQ 1 day McClellan OB/OS Oscillators are now oversold while the remainder are neutral (All Exchange:-45.53/+30.32 NYSE:-63.68/+36.92 NASDAQ:-56.31/+12.62). On the other hand, the OEX Put/Call finds the pros very heavy in puts and expecting weakness at 2.15. The Gambill Insider Buy/Sell Ratio remains neutral at 10.2. We would also note an expanded use of margin has occurred. For the past several weeks, margin debt had been 6% above levels seen one year ago. As of this morning, the level is now 15% above year ago levels, more than doubling.
· In conclusion, it is primarily the fact that the charts have yet to break any important support levels that is keeping us in our near term “neutral” outlook for the major equity indexes. However, the concerns noted above combined with forward valuation of the SPX at over a decade high while investment advisors border on levels of euphoria via the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.5/63.1 suggests to us that risk is elevated compared to potential reward at present. Should support levels break, the picture would likely turn negative.
· Forward 12 month earnings estimates for the SPX from IBES of $132.19 leave a 5.57 forward earnings yield on a 18.0 forward multiple, over a decade high.
SPX: 2,365/NA
DJI: 20,761/NA
COMPQX; 5,804/NA
DJT: 9,412/NA
MID: 1,720/NA
RTY: 1,389/1,416
VALUA: 5,387/5,528