Valuation Remains Near Decade High
Opinion: The indexes closed mostly higher Friday with positive internals on the NYSE and NASDAQ as volumes swelled due to options expiration. No technical events of import were registered while the data dashboard remains largely neutral. In spite of the benign picture being painted by the charts and data, we remain cautious in our near term outlook for the indexes as forward valuation remains near its decade high with an increased use of margin being employed by investment advisors that remain complacent in their market outlook.
- On the charts, all of the indexes closed higher Friday with the exception of the DJI (page 2) closing fractionally lower on the day. Internals were positive on both exchanges on heavy volume due to options expiration. No technical levels of import were breached in either direction although the VALUA (page 5) did manage to close back above its 50 DMA violated earlier in the week. All of the cumulative advance/decline lines are neutral and above their 50 DMAs.
- The data is almost entirely neutral including all of the McClellan OB/OS Oscillators (All Exchange:+4.95/+21.61 NYSE:-3.38/+32.33 NASDAQ:+12.21/+11.95), the Equity and OEX Put/Call Ratios (.58/1.05) and Open Insider Buy/Sell Ratio (44.8). The Total Put/Call Ratio is bullish at 0.96.
- In conclusion, while the charts and data continue to suggest a rather neutral outlook, we remain of the opinion that a high level of risk is present versus potential reward as the forward valuation of the SPX at an 18.2 multiple (0.1 from a decade high) combined with heavy margin exposure (up 20.5% y/y) and the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 18.6/50.0 implying complacency on their part combine to suggest appreciable downside risk is present should an event occur that could cause a shift in sentiment. Such shifts are far from uncommon in market history. And when they happen with the above combination in place, the result can be far more impactful than one might otherwise expect.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.2 forward multiple, near a decade high.
SPX: 2,420/NA
DJI: 21,042/NA
COMPQX: 6,121/6,304
DJT: 9,160/9,487
MID: 1,715/NA
RTY: 1,392/1,419
VALUA: 5,447/5,550