Risk Remains High
Opinion: All of the indexes closed modestly lower yesterday with negative internals on both the NYSE and NASDAQ. Overall volumes were lower than the prior session. There were no technical events of import registered on the charts while the data is mostly neutral with a few cautionary signs appearing. However, in spite of the generally benign message from the data and no sell signals on the charts, we remain near term “negative” in our outlook for the major equity indexes as valuation remains at a decade high, investment advisors are overly optimistic and expanding margin debt converge, suggesting a high degree of risk exists should disappointments appear on the tape.
- On the charts, all of the indexes closed lower yesterday, but modestly so, and on lighter volumes than the prior session.. No support levels were violated while the advance/decline lines for the exchanges remain positive and above their 50 DMAs. The short term trends remain a mix of neutral and positive with no current sell signals.
- The data remains mostly neutral with a few caution signals appearing this morning. Neutral readings are seen on all of the McClellan OB/OS Oscillators (All Exchange:+14.55/+30.95 NYSE:+11.56/+48.54 NASDAQ:+16.99/+14.49), the Total Pt/Call Ratio (0.74) and Open Insider Buy/Sell Ratio (40.3). However, the Equity Put/Call Ratio (contrary indicator) is a bearish 0.51 while the OEX Put/Call Ratio is a very bearish 2.33 as the pros has loaded up on puts as they bet on near term weakness arising.
- Nonetheless, and in spite of the benign nature of the charts, we remain “negative” in our near term outlook as we perceive a high level of risk being present due to extended valuation with the forward p/e of the SPX staying at over a decade high with an 18.2 forward multiple, investment advisors showing a high degree of complacency via the 19.2/50.0 Investors Intelligence Bear/Bull Ratio (contrary indicator) and margin debt expanding by over 20% on a y/y basis. The combinations of these three factors portend a very rough road ahead should the markets experience a rise in concern from its current level of enthusiasm.
- Forward 12 month earnings estimates for the SPX from IBES of $134.56 leave a 5.63 forward earnings yield on a 18.2 forward multiple, near a decade high.
SPX: 2,400/NA
DJI: 20,888/NA
COMPQX; 6,121/NA
DJT: 9,160/9,412
MID: 1,715/1,754
RTY: 1,380/1,416
VALUA: 5,368/5,537