Short Term Outlook Turns “Neutral”
Opinion: All of the indexes closed higher yesterday with positive internals but volumes declined notably form the prior session. The charts saw some further improvement with more new closing highs. However, the data is beginning to yield some additional signs of caution while the VIX is reaching levels suggestive of volatility possibly reentering the markets. As such, we are now inclined to shift our near term outlook form “neutral/positive” to “neutral” while extended forward valuation of the SPX keeps the intermediate term view “neutral” as well.
· On the charts, all of the indexes closed higher yesterday with positive internals. All closed at or near their intraday highs. However, volumes declined notably from the prior sessions suggesting a potential weakening of demand. The DJI (page 2), MID (page 4), RTY (page 4) and VALUA (page 5) all made new closing highs. The SPX closed above its near term resistance while the COMPQX finally closed above its short term downtrend line. We continue to find the stochastic levels well into overbought territory but have yet to become “actionable” by flashing bearish crossover signals. As such, the charts remain positive at this point.
· On the other hand, the data is starting to see some gathering clouds. The All Exchange and NASDAQ 1 day McClellan OB/OS Oscillators are now overbought at +60.97 and +82.53 respectively. The WST Ratio/Composite is bearish at 64.4/161.0 along with the Equity Put/Call Ratio (contrary indicator) that finds the crowd now long calls at 0.51. The OEX Put/Call Ratio (smart money) reveals the pros to be extremely long puts at 2.69, betting on weakness, while the Gambill Insider Buy/Sell Ratio has slipped back to a neutral 22.4. So although not broadly negative, we are starting to see some weakening of the prior bullish data signals.
· We would also note the VIX (page 9) has dropped dramatically during the rally and is now very close to support. Although there is no assurance volatility will spike in the near term, the low level of the VIX does imply the possibility of some degree of volatility reentering the markets, in our opinion.
· In conclusion, while the charts remain bullish and encouraging, the data has shifted to the point of warranting a move to “neutral” from “neutral/positive” for our near term expectations.
· Forward 12 month earnings estimates for the SPX from IBES of $128.76 leave a 5.95 forward earnings yield on a 16.8 forward multiple.
SPX: 2,150/2,187
DJI: 18,603/NA
COMPQX; 5,147/5,282
DJT: 8,115/8,810
MID: 1,540/NA
RTY: 1,250/NA
VALUA: 4,962/NA