VIX Suggests Some Caution Warranted
Opinion: All of the indexes closed higher yesterday with positive internals as volumes declined from the prior session. Multiple new closing highs were achieved on the index charts but the data is increasing its somewhat cautionary tone, including the levels of the VIX. So although the charts remain intact, the data is tempering our enthusiasm, leaving our near term outlook at “neutral” along with that of the intermediate term due to high forward valuation of the SPX.
- On the charts, all of the indexes closed higher yesterday with all but the DJT (page 3) making new closing highs. Internals were positive across the board but volumes slipped from the prior session. As such, the charts remain intact and devoid of sell signals. Breadth has also improved with the NYSE and NASDAQ advance/decline lines turning positive and above their 50 DMAs. However, all of the stochastic levels are disturbingly high but have yet to turn actionable.
- The one chart that is sending a potentially strong cautionary signal is the VIX (page 9). The recent market rally has now pushed the VIX down to levels of last August, suggesting the real potential for volatility to reenter the markets. The VIX lows of last August preceded the two month decline in the markets leading up to the elections. While there are no implications as to when volatility may appear, it typically does so very quickly, catching investors off guard.
- The data has some warnings as well. All of the 1 day McClellan OB/OS Oscillators arte now in overbought territory (All Exchange:+57.7 NYSE:+67.75 NASDAQ:+83.96). They are not extreme, but worthy of note. The Total and Equity Put/Call Ratios (contrary indicators) have turned neutral at 0.84 and 0.57 as the crowd has become less fearful while the pros, measured by the OEX Put/Call Ratio (smart money) are now heavy in puts at 1.62 and looking for weakness. So the data is casting more clouds on the horizon.
- In conclusion, while the charts look fine and lack any sell signals, the data and VIX are suggesting the tables have the potential of turning troublesome, and may do so rather quickly. Thus we are restraining our near term enthusiasm and keeping our outlook at “neutral”. Extended forward valuation of the SPX keeps the intermediate term view “neutral” as well.
- Forward 12 month earnings estimates for the SPX from IBES of $129.76 leave a 5.95 forward earnings yield on a 16.8 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