Near Term Outlook Remains “Neutral”
Opinion: The indexes closed mixed Friday with positive internals on the NYSE while NASDAQ internals were negative. Volumes declined on both exchanges form the prior session. No technical events of import were registered on the charts. The data remains mixed although we are seeing some deterioration of breadth on the exchanges. So while valuation and investor psychology remain a real concern for us, the charts and data continue to imply our near term outlook for the major equity indexes should remain “neutral”.
· On the charts, the RTY (page 4) and VALUA (page 5) close lower Friday with the rest posting gains on the day. NYSE internals were positive while the NASDAQ saw negative internals. Volumes declined from the prior session on both exchanges. No important technical events occurred on the index charts, in our opinion. However, market breadth appears to be weakening as the All Exchange and NASDAQ advance/decline lines have turned negative with the NYSE A/D neutral. As well, we would note that the DJI and SPX would see drops of 800 and 80 points respectively if they were just to test their 50 DMAs. Sell signals have not yet appeared but price does seem to be extended in that regard.
· The data is mixed. Most of the McClellan OB/OS Oscillators are neutral with the exception of the NYSE 21 day being slightly overbought (All Exchange:-31.43/+35.28 NYSE:-33.51/+51.68 NASDAQ:-26.41/+23.85). The Total and Equity Put/Call Ratios (contrary indicators) find the crowd slightly cautious and in puts at 0.94 and 0.7 respectively while the OEX Put/Call Ratio is a bullish 0.66. The Gambill Insider Buy/Sell Ratio remains neutral at 11.2.
· Our concerns come from forward valuation of the SPX based on forward 12 month IBES earnings estimates leaving the SPX at a historically high levels of an 18 forward multiple while investment advisors are quite overly optimistic with a 16.5/63.1 Investors Intelligence Bear/Bull Ratio (contrary indicator). Very high levels of optimism combined with high valuation suggest risk/reward is far from appealing at those levels. Price adjustments could be sudden given this setup.
· In conclusion, while we have some concerns regarding current market risk, the charts and data are suggesting a near term “neutral” outlook is appropriate at this point in time.
· Forward 12 month earnings estimates for the SPX from IBES of $132.19 leave a 5.5 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