Short Term Outlook Remains “Neutral/Positive”
Opinion: All of the indexes closed higher yesterday with all making new all-time closing highs. Internals were positive on the NYSE and NASDAQ as NYSE volumes rose slightly and NASDAQ volumes dipped from the prior session. All short term chart trends are positive. The data remains largely neutral. However, valuation and investment advisor psychology remain a concern which is why we are maintaining our near term “neutral/positive” outlook instead of being outright “positive”. Forward valuation at peak levels keeps our intermediate term view “neutral”.
· On the charts, all of the indexes closed higher yesterday with all closing at new all-time highs. Both the DJT (page 3) and RTY (page 4) finally managed to close above resistance that now places each index in a short term uptrend. Advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive as well. As a side note, the stochastic levels for all of the indexes are now well into overbought territory. However, they are capable of staying at those levels for extended periods. So although they are worthy of some observation, they are not actionable at this stage.
· The data remains mostly neutral. All of the McClellan OB/OS Oscillators are neutral with the exception of the NYSE 21 day that is now overbought (All Exchange:+39.44/+36.02 NYSE:+44.33/+59.02 NASDAQ:+38.28/+24.83). The Equity and OEX Put/Call Ratios are also neutral at 0.61 and 1.14 respectively as is the 10.0 Gambill Insider Buy/Sell Ratio. However, the Total Put/Call Ratio (contrary indicator) has turned bearish at 0.66 as the crowd, by this measure, is overly optimistic with extended call exposure.
· So given the state of the charts and data, one might ask as to why we are not outright “positive” in our near term outlook for the markets. There are two disconcerting issues that keep our enthusiasm in check. First, forward valuation of the SPX based on 12 month forward IBES earnings estimates of $132.70 puts the forward SPX p/e at a 17.5 multiple. That leaves the index at its most expensive valuation in over a decade. Secondly, investment advisors, which have proven to be a very good contrarian indicator over the years, are at peak levels of bullish sentiment as measured by the Investors Intelligence Bear/Bull Ratio at 16.7/62.7. When stocks are expensive and every one’s a bull, the potential for a downdraft in price becomes elevated. Thus some degree of caution is warranted, in our opinion.
· Forward 12 month earnings estimates for the SPX from IBES of $132.70 leave a 5.7 forward earnings yield on a 17.5 forward multiple, near a 12 year high.
SPX: 2,277/NA
DJI: 19,946/NA
COMPQX; 5,576/NA
DJT: 9,141/NA
MID: 1,697/NA
RTY: 1,356/1,357
VALUA: 5,387/NA