VIX and 1 Day OB/OS Imply Risk Becoming Elevated
Opinion: Our next report will be issued on Monday, 11/28. All of the indexes closed higher yesterday with positive internals as volumes rose on both exchanges. Multiple new closing highs were registered on the charts with uptrends remaining intact. However, we are seeing a gathering of data suggesting short term risk is now elevated in the markets; post their significant rally over the past two weeks. As such, the data is forcing us to stay “neutral” for the near term in spite of the charts having yet to flash any sell signals. Forward valuation of the SPX has also risen back to historic highs keeping the intermediate view “neutral” as well.
On the charts, all of the indexes closed higher yesterday with positive internals and higher volume leaving all but the DJT (page 3) at new closing highs. All of the uptrends remain intact with no sell signals appearing. So the charts remain bullish. However, all of the stochastic levels are at the top of their overbought ranges. They may stay that way for extended periods and have not yet given bearish crossover signals. Yet we find them worthy of consideration given the size of the recent rally.
What is of greater concern is the depressed levels of the VIX (page 9) showing volatility is back down to the levels of last August that preceded a two month slide for the markets. The chart is clear in its description that periods of low volatility are followed by periods of higher volatility that coincide with lower equity indexes. As such, it implies near term risk is becoming elevated with potential for some price retracement. The degree of said potential retracement is uncertain and could prove to be modest. Nonetheless, it suggests some caution is now warranted.
The data agrees with the VIX to some degree with all of the 1 day McClellan OB/OS Oscillators overbought (All Exchange:+78.0 NYSE:+89.46 NASDAQ:+90.8). The OEX Put/Call Ratio (smart money) is bearish with the pros loaded up in puts at 2.09 as they expect some weakness to return. And while the Gambill Insider Buy/Sell Ratio remains neutral, it continues to show insiders backing away from the buy side as it has slipped to 13.2. The rests of the data dashboard remains neutral.
In conclusion, while the charts remain positive at this point, we believe there is enough evidence to temper our market enthusiasm to keep our near term “neutral” outlook” in place.
Forward 12 month earnings estimates for the SPX from IBES of $129.72 leave a 5.89 forward earnings yield on a 17.0 forward multiple.
SPX: 2,165/NA
DJI: 18,603/NA
COMPQX; 5,242/NA
DJT: 8,115/8,908
MID: 1,583/NA
RTY: 1,255/NA
VALUA: 4,962/NA